Model negative gearing tax shield.
Net after-tax cash flow
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Rental loss
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Tax saved
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Worked example
Take an investment property that earns $30,000 of rent a year, costs $35,000 in loan interest, and another $6,000 in rates, insurance, and other deductible costs. The property runs at a $11,000 loss, since $30,000 minus $35,000 minus $6,000 is negative $11,000. For an investor on a 37 percent marginal rate, that loss is deductible against salary, saving $11,000 times 0.37, which is $4,070 in tax. The tax saving softens the blow, but the property still costs money to hold. The real out-of-pocket cash flow is the $11,000 loss plus the $4,070 saved, leaving a net cost of $6,930 for the year. Negative gearing reduces the bleed, it does not remove it.
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How it is calculated
Negative gearing happens when the deductible costs of an investment property exceed the rent it earns. The calculator first works out the rental result by subtracting interest and other costs from rent. If that result is a loss, the loss is deductible against your other income, so the tax saved is the loss multiplied by your marginal rate. The net after-tax cash flow is the loss plus the tax saved, which is the genuine amount the property costs you to hold each year. If rent exceeds costs the property is positively geared and there is no negative-gearing benefit. The strategy only pays off if long-term capital growth, later taxed at a discounted rate, outweighs the cumulative holding losses, so it is a leveraged bet on rising prices.