Negative Gearing — The Full Picture

Negative gearing occurs when your rental income is less than your property expenses (interest, rates, insurance, management fees, repairs, depreciation). The resulting loss is deductible against your other income — salary, business income, dividends — which reduces your taxable income and therefore your tax bill. Example: You earn $180,000 from your businesses and consulting. You own an investment property with a $600,000 mortgage at 6.2% interest — that's $37,200/year in interest. Add rates ($2,500), insurance ($1,800), property management ($2,400), maintenance ($1,500), and depreciation ($8,000). Total expenses: $53,400. Rent: $36,000/year. Loss: $17,400. At a marginal rate of 47% (including Medicare levy at that income), your tax saving is $8,178/year. The bet with negative gearing is that capital growth will outpace the cash shortfall. You're funding a portion of the holding cost from your tax saving, and the rest from your cash flow. This only makes sense if: (a) you're on a high marginal tax rate, (b) you have strong confidence in capital growth, and (c) you can service the shortfall comfortably.

Negative gearing is frequently oversold by real estate agents and spruikers who focus on the tax saving while glossing over the cash flow burden. If your marginal rate is below 37%, the tax benefit shrinks significantly. If your property doesn't grow, you've just been subsidising a tenant's rent while losing money. The critical calculation is your total holding cost vs. required capital growth. If a property costs you $12,000/year net (after tax savings) to hold, you need it to grow by more than $12,000 annually just to break even in real terms — before transaction costs. Over five years, you need $60,000+ in growth just to recover holding costs. Positively geared or neutral properties — where rent covers or exceeds costs — are lower risk and allow you to build a portfolio without depleting cash flow. In Brisbane, positively geared opportunities still exist in outer suburbs and regional Queensland, though they come with different risk profiles.