Neutral gearing is where the net income from the property is equal to the interest on the borrowed money.

For example, if Peter and Mary purchased the same investment property for $300,000 but this time they borrowed $150,000 on an interest-only loan at a fixed interest rate of 5% per annum, their net income would be nil.

As there is neither a profit nor a loss, no income tax would be payable by the investor on the profit and there would be no tax deduction for any loss.

Common practice today is to consider all interest plus outgoings on a property, as it relates to income, to assess whether a property is, neutrally geared.