Negative gearing is where the net income from the property is less than the interest on the borrowed money. For example, if Peter and Mary purchased the same investment property for $300,000 but this time they borrow $250,000 on an interest-only loan at a fixed interest rate of 5% per annum, their net loss will be $10,500.

The net loss would be offset against the other income of the investor thus making the loss tax deductible.

As with the last two examples of gearing, most investors and advisors today consider all of the property expenses, rather than just the interest on any borrowings, when determining whether a property is negatively geared or not.

It is prudent to point out that depreciation and building allowance benefits bring tax relief also and result in extra tax savings without an equivalent immediate expense outlay. In some cases, extra tax savings can be enough to make up the after tax shortfall between income and expenses in the early years and so some negatively geared properties actually have a final positive cash flow for the investor.