THE BASIC CONCEPT OF NEGATIVE GEARING
Investing in property is basically like owning and running a business. In a business you have an income, from sales or services, and costs to operate your business (expenses) e.g. telephone, internet, advertising, interest on business loans etc. The way our tax system works is, you are allowed to deduct your expenses from your income, and if you’re left with anything, you are taxed on that amount. Very simplistic explanation.
The same principals apply to investing in property. The amount of rent you receive is basically your “income”. Costs associated with servicing the investment are your “expenses” e.g. interest on your loan, insurances, levies, repairs and maintenance etc. If the expenses associated with the investment are greater than the income/rental, you can effectively claim those expenses which in turn reduces the amount of tax you pay. You are then “negatively geared”. If the income is more than your expenses you become “positively geared”. This may well be the time to grow your investment property portfolio and offset your taxes again if you haven’t already done so. Investing in new property potentially provides greater tax deductions. As mentioned, this is a very simplistic view. If you are new to this, it is highly recommended you seek the opinion of a professional. A good place to start is with an accountant.