How Does Negative Gearing Work?
Negative gearing is one of the most commonly discussed property investment concepts in Australia — and also one of the most misunderstood.
Many people hear that it’s about “saving tax”, but that explanation on its own doesn’t tell the full story. To understand negative gearing properly, you need to look at how income, expenses, and tax interact over time.
Here’s a simple explanation of how negative gearing actually works.
Step 1: You Own an Investment Property
Negative gearing applies to income-producing assets, most commonly residential investment properties.
Once the property is rented out, it generates rental income. At the same time, owning the property creates ongoing costs.
Step 2: You Compare Rental Income to Expenses
The key concept behind negative gearing is the comparison between income and expenses.
Typical expenses include loan interest, property management fees, council rates, insurance, maintenance, and other running costs.
If the total expenses are higher than the rental income, the property is considered negatively geared.
Step 3: A Net Loss Is Created
When expenses exceed rental income, the result is a net loss.
For example, if a property earns $28,000 in rent over a year but costs $35,000 to hold, there is a $7,000 loss.
This loss represents real money that the investor must fund from their own income.
Step 4: The Loss May Be Tax-Deductible
This is where tax comes into the picture.
In many cases, the net loss from a negatively geared property can be offset against other income, such as a salary. This may reduce your taxable income and, as a result, the amount of tax you pay.
It’s important to understand that a tax deduction usually only returns a portion of the loss, depending on your tax rate. It does not eliminate the loss entirely.
Step 5: You Still Fund the Shortfall
Even with tax benefits, negative gearing requires ongoing cash contributions.
The tax benefit helps reduce the after-tax cost of holding the property, but you still need to cover the gap between income and expenses throughout the year.
This is why cash flow and income stability are critical considerations.
Step 6: Long-Term Growth Is Usually the Goal
Most investors who use negative gearing are not focused on short-term income.
The strategy is typically used while aiming for long-term capital growth. The expectation is that over time, the property increases in value and eventually becomes easier to hold as rent rises and loan balances change.
Negative gearing is often most pronounced in the early years of ownership.
Step 7: Loan Structure Influences How It Works
The way an investment loan is structured plays a major role in how negative gearing works in practice.
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 linked.
Step 8: It Needs to Fit Your Overall Financial Position
Negative gearing doesn’t work in isolation.
Your income level, tax bracket, financial buffers, and long-term goals all influence whether the strategy is appropriate.
Tax professionals such as
The Accountants
can help explain how negative gearing applies to your specific tax situation.
How Chase Helps With the Finance Side
While negative gearing is often discussed as a tax concept, the finance structure behind an investment can significantly affect how it works in reality.
Chase Douglas has extensive experience in mortgage lending and helps investors understand how loan structure, interest rates, and cash flow interact with strategies like negative gearing.
Chase focuses on ensuring the finance setup supports your investment goals — not just the tax outcome.
Should You Explore Negative Gearing?
Negative gearing isn’t good or bad on its own — it’s simply a mechanism that works in some situations and not in others.
Understanding how it works is the first step toward deciding whether it fits your financial position and long-term plans.
👉 Book a conversation with Chase Douglas to understand how investment lending works and whether negative gearing makes sense for you.
Clarity always comes before commitment.
