What is negative gearing?

Add up what an investment costs you over a year: loan interest, council rates, insurance, repairs, property management and depreciation on the building and fittings. Set that against the rent received. If the costs are higher, the property is negatively geared and the shortfall is a loss. Capital works and decline in value are the exception: they add to the deductible loss without taking anything out of your pocket, and decline in value is generally not available on second-hand plant and equipment in residential property bought after 9 May 2017.

That loss is deducted against your other assessable income, so a salary earner pays less tax for the year. The ATO treats it as an ordinary deduction for expenses incurred in earning income, not a special concession for property. You still fund the cash shortfall out of your own pocket each month.

Tax relief only returns part of the loss, at your marginal rate. If your loss for the year is $8,000, you do not get $8,000 back. You reduce your taxable income by that amount and the refund is a fraction of it, so the rest is cashflow you have to carry.

That is why lenders look closely at whether you can hold the property when something changes. A vacancy, a big repair or a rise in repayments has to come out of household income, and a buffer matters more on a geared investment than on the home you live in.

Gearing simply means borrowing to invest, and the loan to value ratio decides how geared you are. A bigger loan magnifies the gain if values rise and the loss if they fall, which is the risk sitting behind the tax benefit.

Australian lenders assess an investment loan on rent plus your other income, and most apply a discount to the rent they will count. If you already hold a negatively geared property, the shortfall counts as a commitment when you apply for a mortgage on anything else. Check your situation with your accountant or the ATO.