Glossary · Australian property
Negative gearing.
A tax position where an investment property's deductible costs exceed its rental income, producing a 'rental loss' that reduces other taxable income.
Under ITAA 1997 Div 8, when an investment property's deductible costs (mortgage interest, council rates, insurance, management fees, depreciation under Div 40 + Div 43) exceed its rental income, the difference is a 'rental loss'. The loss can be deducted against other income (salary, dividends, etc.), reducing your overall taxable income for the year.
The tax saving from negative gearing equals the loss × your marginal tax rate. On a $10K rental loss at 39% marginal rate, you save $3,900 in tax. But you still spent $10K of cashflow on the property. Negative gearing reduces but doesn't eliminate the cashflow drag.
The long-run thesis depends on capital growth: holding a negatively-geared property for 7-10 years through a growth cycle aims to make the eventual capital gain (at half-rate due to 50% CGT discount) outweigh the cumulative rental losses. Without growth, negative gearing is just slow wealth destruction.
Worked example
Annual rent $30K, costs (interest + outgoings + depreciation) $42K. Loss $12K. At 39% marginal rate, tax refund $4,680. Net annual cashflow drag: $7,320.
Source
ITAA 1997 ss8-1, 8-5, 25-25; Div 40 + Div 43.
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