Negative gearing explained

The Abbott government says negative gearing has given mums and dads on modest incomes an incentive to invest in residential property.

HOW NEGATIVE GEARING WORKS:

* You borrow money to purchase a residential property or other income-producing asset.

* You make a loss after offsetting any income against interest on the loan and other outgoings.

* You claim that loss as an offset against other income, such as your salary, resulting in a refund from the tax office.

EXAMPLE:

* You purchase a property for $750,000, taking out a $650,000 loan at an interest rate of 5 per cent.

* You rent the property at $600 a week for an annual income of $31,200.

* The annual interest payment of $32,500 creates a shortfall of $1300 even before you add in other tax-deductible outgoings.

* Say the total shortfall adds up to $4000. That amount can be offset against other taxable personal income, such as your salary.