Negative gearing is a cornerstone of Australian property investment strategy. When used correctly, it can significantly reduce your tax burden while building long-term wealth through property.
How Negative Gearing Works
When your investment property costs more to hold than it earns in rent, you have a "negatively geared" investment. The annual loss can be deducted from your other income, reducing your overall tax.
Example Calculation
Rental income: $25,000/year
Expenses (interest, rates, insurance, maintenance, depreciation): $35,000/year
Net loss: -$10,000
If you're on the 37% tax bracket, this $10,000 loss saves you $3,700 in tax.
Deductible Expenses
- Loan interest (largest deduction)
- Council rates and water
- Property management fees
- Insurance premiums
- Repairs and maintenance
- Depreciation (building and fixtures)
Risks and Considerations
Negative gearing only makes sense if the property increases in value over time. You're still making an out-of-pocket loss each year, betting on capital growth to provide the ultimate return.