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Negative GearingNegative gearing is one of a number of financial measures used to evaluate the financial health of a company or investment. In this particular case it actually describes a situation of ill-health for the relevant investment but in some tax regimes a financial loss in one area may be set off against a profit in another. Hence provided it is expected that eventually the investment will make a financial gain, the short term loss may be acceptable. Such a strategy is extremely risky and is probably only of benefit to possibly exploit a tax loophole. Australia In Australia, "gearing" means simply "borrowing". If the borrowing is to invest in an asset that produces taxable income, it is negatively geared if the income is less than the interest payments. (The opposite is positively geared, where the income is more than the cost; neutrally geared means the income is equal to the costs. It is not a tax loophole at all, but Australian taxation law that the shortfall in negative gearing is tax deductable. Purpose While the investor is enduring a loss, he hopes that the investment will rise in price or that the income will increase till the asset is positively geared. For example, in many cities, the price of property in the long term has risen at a higher percentage rate than the normal interest rate charged for borrowing, as has the Australian Sharemarket. Therefore many financial advisors recommend negative gearing, and it has worked for many, although they caution that it is higher risk because gearing magnifies losses as well as profits. Some like Robert Kiyosaki disagree because they recommend only investments with positive cashflow, i.e. what they call assets.
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