Negative gearing, explained plainly

What is negative gearing?

In Australia, an investment property is negatively geared when the annual cost of holding it — loan interest, fees, maintenance, council rates, insurance and depreciation — is greater than the rental income it earns. That shortfall is a financial loss.

A worked example

Here's how the numbers might look for a typical Brisbane investment property over a financial year:

In this example, the investor can claim the $14,000 loss as a deduction. On a $100,000 salary, they're taxed as though they earned $86,000 — reducing their tax bill for the year. (Figures are illustrative only; your actual position depends on your loan, rate and expenses.)

Why investors accept a short-term loss

Negative gearing is fundamentally a capital growth strategy. Investors accept a short-term cash flow shortfall on the expectation that the property's value will grow over the long term, and that the eventual capital gain will outweigh the accumulated annual losses.

Loan structure considerations

How your investment loan is structured affects how the numbers play out:

• Interest-only periods keep repayments lower during the term, with the full repayment amount going toward deductible interest.
• Paying down principal reduces your outstanding debt and interest cost over time — good for equity, but it also reduces the size of the deduction. Which approach suits you depends on your broader goals, not a one-size-fits-all rule.