Negative Gearing
When the costs of owning an investment property (interest, expenses) exceed the rental income, creating a tax-deductible loss.
Negative gearing occurs when the total expenses of an investment property (mortgage interest, rates, insurance, maintenance, depreciation, property management fees) exceed the rental income, creating a net rental loss. Under Australian tax law, this loss can be offset against your other assessable income (such as salary), reducing your overall taxable income and therefore your tax bill.
For example, if your rental income is $25,000 per year and your total expenses are $35,000 (including $20,000 in interest), you have a net rental loss of $10,000. On a marginal tax rate of 30%, this reduces your tax by $3,000. However, you are still $7,000 out of pocket after the tax benefit — negative gearing doesn't make a loss profitable, it only reduces the after-tax cost of that loss.
The strategy relies on the expectation that capital growth on the property will more than compensate for the ongoing rental losses. When you eventually sell the property, the capital gain is subject to CGT (with the 50% discount if held for more than 12 months). Negative gearing has been politically contentious in Australia, with periodic debate about whether it should be limited or abolished. Currently, it applies to all asset types (not just property) and there is no cap on the amount of losses that can be offset against other income.