How Does Negative Gearing Work?
Negative gearing is one of the most common terms used in Australian property investing, yet many people aren’t quite sure what it actually means in practice.
At its core, negative gearing is about the relationship between rental income, property expenses, and tax. Understanding how those elements work together can help you decide whether it’s something worth exploring.
Here’s a simple, step-by-step explanation of how negative gearing works.
Step 1: You Purchase an Investment Property
Negative gearing applies to income-producing assets, most commonly residential investment properties.
Once the property is rented out, it generates income in the form of rent. At the same time, owning the property creates ongoing costs.
Step 2: You Add Up the Ongoing Expenses
Every investment property comes with expenses.
These typically include loan interest, property management fees, council rates, insurance, maintenance, repairs, and other running costs.
These expenses are an unavoidable part of owning an investment property.
Step 3: You Compare Income to Expenses
Negative gearing is determined by comparing rental income to total expenses.
If the rent you receive is less than the costs of holding the property, the property is considered negatively geared.
This difference creates a net loss.
Step 4: A Net Loss Is Created
When expenses exceed income, you need to contribute money from your own income to cover the shortfall.
For example, if your property earns $30,000 per year in rent but costs $38,000 to hold, you have an $8,000 loss.
This loss represents real cash leaving your budget.
Step 5: The Loss May Be Tax-Deductible
This is where negative gearing often gets attention.
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 taxable income and lower the amount of tax you pay.
It’s important to understand that a tax deduction usually only returns part of the loss, depending on your tax rate. It does not eliminate the loss entirely.
Step 6: You Still Fund the Shortfall
Even with tax benefits, you still need to cover the gap between rental income and expenses throughout the year.
The tax benefit helps reduce the after-tax cost of holding the property, but cash flow remains critical.
This is why negative gearing works best for people with stable incomes and sufficient financial buffers.
Step 7: Long-Term Growth Is Usually the Goal
Most investors use negative gearing while aiming for long-term capital growth.
The expectation is that while the property may cost money to hold in the early years, its value will increase over time and eventually outweigh the holding costs.
As rent increases and loan balances change, many properties move closer to neutral or positive cash flow.
Step 8: Loan Structure Influences the Outcome
How your investment loan is structured plays a major role in how negative gearing works in practice.
Interest rates, repayment type, and the use of offset accounts all affect cash flow and affordability.
This is why finance decisions and tax outcomes are closely connected.
Why Understanding How It Works Matters
Negative gearing isn’t good or bad on its own — it’s simply a mechanism.
Understanding how it works helps you assess whether the strategy fits your income, cash flow, and long-term goals before making decisions.
Tax professionals such as
The Accountants
can help explain how negative gearing applies to your tax position.
How Chase Helps With the Finance Side
While negative gearing is often discussed as a tax concept, the finance structure behind the investment can significantly affect how it works in reality.
Chase Douglas has extensive experience in mortgage lending and helps investors understand how loan structure, borrowing capacity, and cash flow interact with strategies like negative gearing.
Chase focuses on ensuring the finance setup supports your long-term plans, not just short-term tax outcomes.
Should You Explore Negative Gearing?
Negative gearing can be effective in the right circumstances — but only when it’s fully understood.
Understanding how it works is the first step toward deciding whether it’s right for you.
👉 Book a conversation with Chase Douglas to understand how investment lending works and whether negative gearing makes sense for your situation.
Clarity always comes before commitment.
