Negative gearing means that the interest you are paying on the loan and all other associated costs with your investment property is more than the income/rent you earn and as a result you are making a loss.
What makes negative gearing particularly useful when it comes to personal tax is that any net loss from investment properties can be offset against other income that would otherwise be included in your assessable income.
What that means is that your taxable income bracket, and ultimately the amount of tax that you need to pay, is potentially reduced.
Meanwhile, if the investment property goes up in value, but you don’t sell it, no capital gains tax will be payable.
It’s important to understand that negative gearing is available for other investments as well, such as shares or businesses. The relevant tax legislation allow this if the investor intends to recoup their costs and make a profit. Therefore, the tax is eventually paid.
And on the other side of the tax equation, property investors have to pay Capital Gain Tax when they dispose of the asset.
Unfortunately, negative gearing is also a political football, which is often mistakenly blamed for increasing house prices.
The problem is that many people with only a hazy idea of what it actually is, blame negative gearing for virtually everything from locking first home buyers out of the market, to causing high property price rises, to ugly greedy investors rorting the tax system and driving the National Budget into deficit.
The truth of the matter is that negative gearing is a funding model that is usually only used for a short period of time« Back to Glossary Index