Negative gearing explained simply (with real numbers)

Negative gearing gets debated endlessly and explained badly. Here’s the simple version: if your investment property costs more to hold than it earns in rent, the loss reduces your taxable income. You’re still losing money each month, just less than you would without the tax effect.

A worked example

Say a property rents for $650/week ($33,800/year) but costs $52,000/year to hold, loan interest, rates, insurance, management, maintenance. The $18,200 shortfall is deductible. On a 37% marginal tax rate, the ATO effectively hands back about $6,700, cutting your real out-of-pocket cost to roughly $11,500 a year, or about $220 a week.

Why investors accept the loss

The bet is capital growth: if the property gains 5% a year on a $900,000 value, that’s $45,000 of (unrealised) growth against $11,500 of net holding cost. If the growth doesn’t come, negative gearing is just… losing money efficiently. The strategy is only as good as the asset.

Positive gearing and the middle path

A positively geared property earns more than it costs, you pay tax on the surplus, but it feeds your cash flow rather than draining it. Many investors aim to start negative and turn positive as rents rise and the loan shrinks. Depreciation deductions (strongest on newer builds) can make a property cash-flow negative but “tax positive” on paper.

What it means for your loan

• Some lenders add negative gearing benefits back into serviceability, increasing what you can borrow.
• Interest-only periods maximise the deductible cost while you hold non-deductible home debt. See interest-only loans.
• Structure matters: keep investment and personal debt in separate splits from day one.

This is general information, not tax advice, your accountant should bless the numbers. For the lending side, Nathan structures investment loans that keep the deductions clean and the lender generous.