What on Earth is 'Negative Gearing'? A Buyer's Guide to Financial Confusion

If you've spent any time chatting with real estate agents, mortgage brokers, or financial planners in Australia, you've probably heard the term 'negative gearing' thrown around like it's common knowledge. Spoiler alert: it's not. And if you've nodded along while secretly wondering what on earth they're talking about, you're not alone.

So What Exactly IS Negative Gearing?

Let's break it down in the simplest way possible. Imagine you buy an investment property and rent it out. You're hoping the rental income will cover your mortgage payments, rates, insurance, and maintenance costs. Sounds reasonable, right?

Well, negative gearing is when it doesn't. When your expenses exceed your rental income, you're in the red. You're literally paying money out of your own pocket each month to keep the property afloat. It's like having a hobby that costs you money every single month—except this hobby is a house.

Why Would Anyone Do This?

You might be thinking, 'That sounds like financial suicide!' But here's where it gets interesting. In Australia, you can claim those losses against your taxable income. So if you're earning $100,000 a year and your negatively geared property costs you $10,000 annually, you might only pay tax on $90,000. That tax deduction can be worth thousands of dollars.

Additionally, property investors often bet on capital growth. They're thinking, 'Sure, I'm losing money each month, but in five years, this property will be worth $100,000 more, and that's where I'll make my real profit.' It's a long-term strategy that relies on property prices going up.

The Flip Side: Positive Gearing

On the other end of the spectrum, you have positive gearing. This is when your rental income exceeds your expenses. You're actually making money each month. It sounds excellent, and it is—but it's also rarer in Australia's current Market, especially for newer investors.

The Bottom Line

Negative gearing is a strategy where you're paying out of pocket to hold an investment property, betting that it will appreciate in value and that the tax benefits will offset your losses. It's not for everyone, and it requires careful financial planning. Before investing in a negatively geared property, ensure you understand the risks and have the financial capacity to sustain any potential losses.

And next time someone mentions negative gearing at a dinner party, you can confidently explain it without that confused look on your face!

This is general advice and not financial advice.