Negative Gearing occurs when the expenses of owning an investment property, including loan interest, exceed the rental income received. This creates a loss, which you can offset against other income to reduce your overall taxable income.
For instance, consider Alex, who purchases an investment property, earning $25,000 annually in rent, but incurs $18,000 in loan interest and $10,000 in other expenses like maintenance and management fees, totalling $28,000 in costs. This scenario leaves Alex with a $3,000 loss due to his expenses exceeding his rental income, a situation known as negative gearing. Alex can then deduct this $3,000 investment property loss from his other taxable income, say a salary of $80,000, effectively reducing it to $77,000 and lowering his overall tax liability.
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