What is negative gearing?

Answer

Gearing just means borrowing to invest. ‘Negative’ gearing occurs when you borrow money to buy an investment property and the loan repayments, interest and other costs that you incur are more than the income you receive. That loss reduces your taxable income and, in turn, your tax bill.

The higher the rate of tax you’re paying, the more tax you can save in deductions. So negative gearing can be particularly attractive for investors on high marginal tax rates.

But don’t forget, if you’re negatively geared you’re still making a loss. For negative gearing to work, the investment needs to gain enough in value during the time you hold it to offset the losses you make along the way. This means negative gearing can be a risky strategy, particularly if your situation changes and you can’t service the debt as easily.

Negative gearing can be an effective strategy to build wealth but make sure you understand the risks and get the right advice along the way.

 

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