How Negative Gearing Works (In Simple Terms)
Negative gearing is often talked about as a “tax strategy”, but that description alone doesn’t really explain how it works in practice.
At its core, negative gearing is about the relationship between income, expenses, and tax. Understanding how those pieces fit together can help you decide whether it’s something worth exploring — or something to approach cautiously.
Here’s a simple, step-by-step explanation of how negative gearing works.
Step 1: You Buy an Investment Property
Negative gearing only applies to income-producing assets, most commonly investment properties.
Once the property is rented out, it begins generating income in the form of rent. At the same time, it also generates costs.
Step 2: You Compare Income to Expenses
The key to negative gearing is comparing what the property earns versus what it costs to hold.
Common expenses include loan interest, property management fees, council rates, insurance, maintenance, and other ongoing costs.
If the total expenses are higher than the rental income, the property is negatively geared.
Step 3: A Net Loss Is Created
When expenses exceed income, the result is a net loss.
For example, if a property earns $25,000 in rent for the year but costs $32,000 to hold, the property has a $7,000 loss.
That loss is the foundation of how negative gearing works.
Step 4: The Loss May Be Tax-Deductible
This is where tax comes into play.
In many cases, the net loss from a negatively geared property can be offset against other income, such as your salary.
This may reduce your overall taxable income, which can result in paying less tax.
It’s important to understand that a tax deduction usually returns only a portion of the loss — not the full amount.
Step 5: You Fund the Shortfall
Even with tax benefits, you still need to cover the gap between rental income and expenses.
This is why cash flow matters so much. A negatively geared property requires you to contribute money from your own income to hold it.
The tax benefit helps soften the impact, but it doesn’t eliminate the cost entirely.
Step 6: Long-Term Growth Is the Expected Payoff
Most investors who use negative gearing are focused on long-term capital growth.
The idea is that while the property may cost money to hold in the short term, its value may increase over time, potentially outweighing the holding costs.
Negative gearing is often most common in the early years of an investment, before rent increases or loan balances reduce.
Step 7: Loan Structure Influences the Outcome
How the investment loan is structured plays a major role in how negative gearing works.
Interest rates, whether the loan is interest-only or principal and interest, and how offset accounts are used all affect cash flow and the size of the loss.
This is why finance decisions and tax outcomes are closely connected.
Step 8: It Needs to Fit Your Overall Financial Position
Negative gearing doesn’t work in isolation.
Your income level, tax bracket, financial buffer, and long-term goals all influence whether the strategy is suitable.
Advice from professionals such as
The Accountants
can help explain how negative gearing works from a tax perspective and how it fits into your broader financial position.
Why Understanding How It Works Matters
Negative gearing can be effective in the right circumstances — but only when it’s fully understood.
Misunderstanding how the cash flow and tax elements interact is one of the most common reasons people struggle with investment properties.
Taking the time to understand how it works helps you make info
