Examples of Negative Gearing
Suppose you bought a property for $600,000 by taking out a $500,000 loan with an interest rate of 7%. This means that the interest payments are $35,000 annually.
Meanwhile, you are renting out the investment property for $550 a week, which is $28,600 over the whole year.
Since you are paying $35,000 in interest but only earning $28,600 in rental income, you have a net loss of $6,400. This means that you are negatively geared. You can offset the $6,400 against your taxable income to pay less tax.
A year later your property is valued at $648,000 as property prices have risen 8%. Therefore even though you had a loss of $6,400, you are $41,600 better off than the year before as the capital gain is much higher than loss you made on repayments.