Negative gearing is a financial strategy where an individual borrows money to invest in an asset (such as property, shares, or a business) with the expectation that the income generated from the asset will not cover the costs associated with owning and maintaining it. The resulting loss can be claimed as a tax deduction, reducing the investor’s taxable income and potentially lowering their tax bill.
For example, in the context of property investment, an individual may purchase a rental property using a loan and rent it out to tenants. If the rent received is insufficient to cover the costs of mortgage repayments, property maintenance, and other expenses, the investor may be left with a net loss. This loss can then be offset against other income (such as wages) for tax purposes, reducing the amount of tax the investor has to pay.
Negative gearing can attract investors by allowing them to leverage their investments and potentially receive tax benefits. Still, it also involves risks such as potential losses if the asset does not perform well or if interest rates rise. It is essential to consider the risks and benefits of negative gearing before deciding whether it is a suitable investment strategy for a particular individual.