Not many countries have negative gearing. And it is a foreign concept to many that I have spoken to.
The general idea is that losses made from an investment can be used to reduce taxation from salary.
Why make losses, most people ask ?
Why would the government allow that ?
I guess, as with most investment around the world, you expect a short term loss, then a break even point, then a longer term gain.
Like when you buy a new car, the first couple of years, depreciation is the highest. You make the most losses. Though only a small percentage of cars can be considered investments. Not a good analogy.
Say Shares. When you buy shares, you make a loss because of frictional costs (trading costs, fees, etc). And then you have to wait for the share price to rise, or wait for dividend, before you break even and then make profits later on as prices go higher than inflation. Now imagine if you are borrowing money to buy shares. The initial "loss" will be higher.
When you buy a property, it is also usually with mortgage. How much do you need the property to rise before you can sell it for a profit ? Think about the fees, stamp duties, interest payments, etc.
People are betting on the fact that capital growth of the property in time exceeds the interest and inflation rates and it becomes a profit in future.
Negative gearing allows investors to use the losses in the first few years to offset their income (even if it is from employment). Most countries allow the losses to offset FUTURE profits (from capital gains tax, or from future rental profits) but countries allowing negative gearing lets you offset those losses NOW.
In Australia, negative gearing is not just for properties, you can also use negative gearing on shares, as far as I know.
Is it for me ?
I am not a financial advisor, so don't take my words with much weight.
Negative gearing is probably useful if you have other income to offset against, so as to reduce taxation.
Maybe a steady employment income.
But if your income is not stable, it may not be worthwhile.
