How to Calculate Negative Gearing

Negative gearing is a financial strategy where an investor borrows money to purchase an income-generating asset, such as a rental property, with the goal of offsetting the interest expense against the rental income. This strategy can provide tax benefits and potentially increase the investor's after-tax cash flow.

What is Negative Gearing?

Negative gearing refers to a situation where the operating expenses of an investment property exceed its rental income. When an investor borrows money to purchase the property, the interest expense can be used to offset the operating expenses, resulting in a net loss for the property.

In some countries, such as Australia, negative gearing is a tax incentive that allows investors to deduct the interest expense from their taxable income. This can lead to significant tax savings, making negative gearing an attractive investment strategy.

Negative gearing is not available in all countries. It is a tax incentive that exists in some jurisdictions, such as Australia, but not in others.

Negative Gearing Formula

The negative gearing ratio is calculated by comparing the rental income to the total expenses, including interest. The formula is:

Negative Gearing Ratio = (Rental Income - Operating Expenses) / Interest Expense

A negative gearing ratio greater than 1 indicates that the rental income is sufficient to cover the operating expenses and the interest expense, resulting in a net loss for the property.

How to Calculate Negative Gearing

To calculate negative gearing, follow these steps:

Determine the rental income from the property.
Calculate the operating expenses, including mortgage interest, property management fees, insurance, and maintenance costs.
Calculate the interest expense on the mortgage.
Apply the negative gearing formula to determine the negative gearing ratio.

Use our calculator in the sidebar to perform these calculations quickly and accurately.

Example Calculation

Consider a rental property with the following details:

Description	Amount (AUD)
Rental Income	$2,000
Operating Expenses	$1,500
Interest Expense	$500

Using the negative gearing formula:

Negative Gearing Ratio = ($2,000 - $1,500) / $500 = $500 / $500 = 1.0

The negative gearing ratio of 1.0 indicates that the rental income is sufficient to cover the operating expenses and the interest expense, resulting in a net loss for the property.

FAQ

What is the difference between negative gearing and positive cash flow?

Negative gearing refers to a situation where the operating expenses of an investment property exceed its rental income, resulting in a net loss for the property. Positive cash flow, on the other hand, refers to a situation where the rental income exceeds the total expenses, including interest, resulting in a net gain for the property.

Is negative gearing available in all countries?

Negative gearing is not available in all countries. It is a tax incentive that exists in some jurisdictions, such as Australia, but not in others.

What are the benefits of negative gearing?

The benefits of negative gearing include tax savings, increased after-tax cash flow, and the potential to build equity in the property over time.