What is negative gearing in Australia?

When an investment property's deductible costs exceed its rental income, the difference is a 'rental loss'. Under Australia's negative-gearing rules (ITAA 1997 Div 8), this loss can be deducted against your other income (salary, dividends, etc.), reducing your overall taxable income.

Worked example: $40,000 annual rent. Costs: $35,000 interest + $5,000 outgoings + $8,000 depreciation = $48,000 deductible costs. Rental loss = $48,000 - $40,000 = $8,000. If your marginal tax rate is 39%, you save $3,120 in tax that year (loss × marginal rate).

Negative gearing isn't a permanent strategy, it relies on capital growth eventually outweighing the cumulative cashflow losses. Holding a negatively-geared property indefinitely is wealth destruction; holding it 7-10 years through a growth cycle is wealth creation. The math is in the cashflow projector.

The interaction with CGT matters: when you sell, depreciation claimed (Division 43 capital works deductions) is added back to the cost base on a 'recapture' basis. So part of the negative-gearing benefit is paid back at sale. The 50% CGT discount for assets held over 12 months still applies, so the recapture is effectively halved.