Negative gearing is one of the most misunderstood concepts in Australian property. Here's what it actually is — and whether it helps or hurts.

The Three Flavours of Gearing

Gearing simply means borrowing to invest. When you buy an investment property with a loan, you're geared. Whether you're positively, negatively, or neutrally geared depends on one thing: is the rental income more or less than the costs?

Neutral Gearing

Rental income equals holding costs. No impact on your taxable income.

Positive Gearing

Rental income exceeds costs. You're making money — and you'll owe more tax because your total income has increased.

Negative Gearing

Costs exceed rental income. You're losing money on the property each year. But that loss reduces your taxable income, which means a tax refund.

The Maths Behind Negative Gearing

If you earn $140,000 from your job and your investment property loses $5,200 per year, your taxable income drops to $134,800. You've been paying tax on $140,000 all year, so the ATO refunds the difference — roughly $1,910.

Still sounds like a bad deal though, right? You lost $5,200 and got back $1,910. You're still down $3,290.

Why People Do It Anyway

The main reason is capital growth. If the property increases in value by more than your after-tax loss each year, you come out ahead when you sell. The tax deduction is the cream on top — it softens the blow of negative cash flow while you wait for the property's value to grow.

It's important to remember: it's like paying $1 in interest to save 30 cents in tax. Don't buy an investment property purely for the tax deduction. Buy it for the capital growth potential, and let the tax benefits help with the holding costs along the way.

The Bottom Line

Whether your property is positively or negatively geared, you can claim the interest on the investment loan as a tax deduction. That's what makes it "good debt". Your home loan? No such benefit. Which is why most accountants say: pay off the home loan first, and keep the investment debt running.