Negative Gearing, Properly Explained.

Negative gearing gets thrown around in every property conversation, and half the time it's used incorrectly. So before we talk about what's changed, let's talk about what it actually is.

What Negative Gearing Actually Means

Negative gearing happens when the cost of holding an investment property is higher than the income it produces. Your interest repayments, your property management fees, your council rates, your insurance, your depreciation — add all of that up, and if it's more than the rent you're collecting, you've made a loss on the property for that year.

Under Australia's tax system, that loss isn't just absorbed. It can be deducted against your other income — historically, against your salary. So if you earned $120,000 from your job and lost $10,000 on your investment property, you were taxed as though you'd earned $110,000. The property loss reduced your tax bill on unrelated income.

That's the entire mechanism. It's not a subsidy, a grant, or a government payment. It's a deduction, and it works the same way any other investment loss works against income for tax purposes.

Why Investors Deliberately Buy a Loss-Making Asset

Why would anyone deliberately buy something that loses money? Because the loss is usually temporary, and the asset underneath it isn't. Property investors negatively gear on the expectation that capital growth over time will more than make up for the annual cash loss, and that as rents rise and the loan balance stays fixed, the property eventually turns positive. Negative gearing was never really the goal. It was the cost of getting into an asset before it appreciated.

Negative Gearing Has Been Around Since 1936

It's also worth knowing this isn't a recent invention. The ability to offset property losses against other income in Australia dates back to 1936 — roughly ninety years — not to any recent reinstatement. The 50% capital gains tax discount, which usually gets mentioned in the same breath, is a separate and much newer mechanism, introduced in 1999. They're often talked about as one thing. They're not. One affects your tax during the years you hold the property. The other affects your tax when you sell it.

Why the Distinction Matters More Now Than Ever

Understanding the difference matters more now than it used to, because recent reforms have started treating them differently — narrowing negative gearing for future purchases of established property while replacing the CGT discount altogether with a new indexation system. Two separate mechanisms, moving on two separate tracks. If you only understand negative gearing as "the thing that's changing," you'll misread what's actually happening to your existing portfolio, and what's actually happening to anything you buy next.