Negative Gearing Explained: What It Means for Your Property Investments

Negative gearing is a buzzword that gets thrown around a lot in property investing circles, but what does it actually mean, and how can it work for you? At Lifestyle Led Wealth, we believe that no two investment journeys are the same, and understanding negative gearing is a crucial step in figuring out what works best for your financial goals. We’re here to break down negative gearing, explore who it’s suited for, and why having a solid strategy is key when considering a negatively geared property.

What Is Negative Gearing?

Let’s start with the basics. Negative gearing happens when the income you earn from an investment property (like rent) is less than the costs of owning it (like mortgage repayments, maintenance, and other expenses). In simpler terms, you’re losing money on the property in the short term.

So, why would anyone want to lose money? Because those losses can be used to reduce your taxable income, which could save you money at tax time. For example, if your negatively geared property costs you $5,000 more a year than it earns, that $5,000 can be deducted from your taxable income, potentially lowering your tax bill.

The theory is the loss in negative gearing is offset by the capital gain you receive on the investment.

Negative Gearing Example

Say you own an investment property that earns $20,000 a year in rental income but costs $25,000 to maintain and repay the mortgage. That $5,000 shortfall can be offset against your other income (like your salary), reducing the amount of tax you owe. This negative gearing investment property strategy can be useful for high-income earners who want to reduce their tax liability while building wealth through property.

Is Negative Gearing Right for You?

While negative gearing can sound appealing, it’s not for everyone. For some people, the idea of losing money to make money doesn’t sit right—and that’s fair! Negative gearing is best suited to individuals with stable incomes who are in a strong financial position to cover the shortfall.

It’s important to remember that this strategy relies on the property increasing in value over time (capital growth). If property prices don’t rise, or if you’re forced to sell earlier than planned, you could find yourself at a loss. At Lifestyle Led Wealth, we take a big-picture approach to your finances. That means we’ll never recommend negative gearing without first considering your entire financial situation and lifestyle goals.

Negative Gearing vs. Positive Gearing

What about positive gearing? Positive gearing is the opposite of negative gearing—it’s when your rental income exceeds the costs of owning the property. For example, if your investment property earns $25,000 in rent but costs $20,000 to maintain, you’d have $5,000 in positive cash flow. While this might sound like a no-brainer, the downside is that the extra income is taxable, which means you’ll need to pay tax on it.

The choice between negative gearing and positive gearing property investments comes down to your goals, financial situation, and risk tolerance. Negative gearing can reduce your taxable income while you wait for capital growth, whereas positive gearing provides extra cash flow but could increase your tax bill.

Why You Need a Strategy

Negative gearing isn’t a set-and-forget solution—it’s a strategy that requires careful planning for the future. At the end of the day, you’re still losing money in the short term, so it’s essential to have a clear plan for how you’ll manage your cash flow and make the most of your investment. Here’s where Lifestyle Led Wealth can help. We work with you to:

• Assess your current financial position and whether negative gearing fits your needs
• Create a plan to leverage your equity for long-term growth
• Ensure your investments align with your broader lifestyle goals

By taking a holistic approach, we make sure negative gearing isn’t just a tax-saving tool—it’s part of a bigger plan to help you build wealth and achieve your dream lifestyle.

Unlock Your Equity and Invest Smarter with Negative Gearing

Do you feel like you’re paying too much tax or that your home equity is sitting idle? Negative gearing could be a way to unlock your equity and start building wealth through property investments. However, it’s not the right approach for everyone—the key is to have a strategy that aligns with your financial goals and the life you want to lead. At Lifestyle Led Wealth, we’ll guide you through the process of choosing the right investment strategy—whether that’s negative gearing, positive gearing, or something else entirely.

Ready to Explore Your Options?

If you’re curious about negative gearing or want to explore other investment strategies, get in touch with Justin at Lifestyle Led Wealth today. Together, we’ll help you understand your options, reduce your tax burden, and create a plan that works for you.