what’s all the fuss about negative gearing?

Let’s start off by saying few topics in real estate are as controversial, widely debated, or as misunderstood as negative gearing. When an investment is negatively geared, in simple terms it means you’re losing money, so the government will give you a small amount of that loss back. Spending $1 to reduce your tax bill by $0.45 is a pretty silly way to save money, so anyone selling you on negative gearing as a strategy typically:

a) is selling you something that may not be in your best interest

b) doesn’t know what they’re talking about and just wants to sound informed

c) if coming from a profession there may be a genuine reason, but I’d get a second opinion.

We’re not saying using the tax benefits from negative gearing is wrong, and we’re not saying you should never buy a property that is negatively geared, what we’re saying is this is a small benefit of losing money on property. It shouldn’t be the cornerstone of your strategy.

Cashflow positive properties are almost always better than negatively geared properties, everything else being equal.

Now that we have that out of the way, onto the boring stuff…negative gearing is a financial strategy commonly used in real estate investing, particularly in Australia. It occurs when the expenses associated with owning an investment property (such as interest, property maintenance, property management fees, and rates) exceed the rental income generated by the property. As a result, the investor incurs a net loss from the investment property, which can be used to offset other taxable income.

The term "negative gearing" comes from the fact that the investor's rental income is not sufficient to cover all expenses, resulting in a negative cash flow. However, this negative cash flow can be used to reduce the investor's taxable income for the year, potentially resulting in a lower overall tax liability. In essence, the investor is "gearing" their investment to benefit from tax deductions associated with the property's expenses.

While negative gearing can provide tax benefits and help investors offset losses in the short term, it relies on the expectation of future capital appreciation to generate a positive return on investment. Investors may anticipate that property values will increase over time, allowing them to sell the property at a profit in the future. Additionally, negative gearing is subject to regulatory and tax policies, and it has been hotly debated by political parties and the media many times and is likely to be the subject of many more public debates in the future given it’s hot button status.