There's been a lot of talk in recent years about how difficult it is for young people to buy a home in Australia, but with everything getting more expensive lately, the conversation has been intensifying. 

And the discussions usually include terms such as "negative gearing" and "capital gains tax concessions". 

These may sound like complicated concepts, but you don't need to be a financial expert to understand them.

And you shouldn't feel silly if you don't quite understand negative gearing because the chances are that the explanations you're getting are overly complicated and full of financial jargon, so they're not actually providing any clarity.  

Here's a breakdown of negative gearing in simple terms.

What is negative gearing (in one sentence)?

Negative gearing is when investment property owners operate at a loss, and then deduct that loss from their overall income tax bill.

What is the point of negative gearing? 

We went to ABC business reporter Michael Janda to make sense of all this for us. 

It's important to remember that negative gearing isn't new. 

It was abolished in the mid 80s but was reinstated within about two years.

And the current rules have been in place since 1987. 

"It's a long-standing feature of the Australian tax system — the idea that you can deduct your costs from any gross profits to make sure you're only taxed on your net earnings.

"Think of it as being a bit similar to some of the work-related tax deductions many of us claim for things like home offices, union fees, travel expenses, self-education, etc.

"The controversy is not over investors being able to deduct costs from their rental income, but that they can use any net losses from their rental properties to reduce the taxable income from their wages or other earnings that are totally unrelated to their property investment.

"Many countries do not allow this and restrict using property tax deductions only to income generated by those property investments."

What is negative gearing in simple terms?

Say you buy a house and rent it out.

But the money you make from the rent is less than your mortgage interest payments, maintenance bills and other costs.

So you're running at a loss.

That loss is commonly referred to as negative gearing (as opposed to positive gearing, which is when your rent is more than your costs, so you make a profit).

Losing money on an investment property sounds like it should be a bad thing.

But property owners can use that to their advantage at tax time.

They do this by deducting their rental losses from their overall income for the year.

So let's say they earn $80,000 and their property runs at a loss of $10,000.

They can deduct that from their income when filing their tax returns for the financial year. 

That means they're only paying tax on $70,000.

And that means they're paying less tax.

So, without negative gearing, they'd be paying about $16,000 in tax.

But when they factor in their negative gearing losses, they only pay about $13,000.

Now, this doesn't completely cancel out their loss, it just reduces it.

They're still running at a loss of $7,000.

And, again, this sounds like a bad thing — but there's more to the story.

How is negative gearing beneficial?

You have to think long term. 

Janda explains the major benefit comes from combining negative gearing with a discount to something called the capital gains tax.

This discount was introduced back in 1999 — but we'll get to that in a second. 

Janda continues the example with our imaginary investor above.

Let's say they bought that property for $500,000.

Five years later, they sell it for $750,000.

Janda takes into account the original cost price of the house plus extra fees — think stamp duty and conveyancing costs —  to assume the person makes an overall profit of $200,000. 

"The investor has to pay income tax on that profit, which is called capital gains tax.

"But the 50 per cent capital gains tax discount means they only pay tax on half of that profit, so instead of paying tax on $200,000, they only pay tax on $100,000.

"Our investor's total tax bill that year will be a tad under $48,000 on a total net income of $270,000.

"If they had to pay tax on all the capital gain, or had earned that much from wages or a salary, they'd have had to pay more than $92,000 in tax.

"So, it's not the $15,000 or so in tax savings over the five years that makes negative gearing so attractive, but the combination with reduced taxed profits at the end — assuming the property's value goes up."

What is capital gains tax?

Capital gains tax is the tax people pay on the profits they make from selling assets — in this context it's on property sales, but it can be any asset including shares and crypto currency.

These profits are considered part of the person's earnings for that financial year.

When did the capital gains tax discount come in?

More than 20 years ago.

It's also referred to as the capital gains tax concession. 

To understand the magnitude of this discount, Janda takes us back to when John Howard was Australia's prime minister: 

"In 1999, the Howard government made a dramatic overnight change to capital gains tax.

"When the Hawke government first introduced that tax in the mid-1980s, it allowed investors to deduct inflation from their profits, so that they were only paying tax on the 'real' gain.

"But John Howard and his treasurer Peter Costello replaced that system with a blanket 50 per cent discount on capital gains tax.

"Unless you're holding an investment for more than 16 years, that means you'll probably pay less tax on any profits than under the old system."

How does negative gearing interact with the capital gains tax discount?

This is the big issue because it means investors can end up paying much less tax, Janda says. 

"If you can use negative gearing to offset your current rental losses at your full marginal tax rate (45 per cent for high-income earners) but then pay effectively half that rate of tax (22.5 per cent) on any capital gains (profits) then that looks like a pretty attractive way to pay less tax overall — assuming your investments do make a profit.

"It's probably no coincidence that property investment really took off in the early 2000s.

"Former Treasury secretary Ken Henry, who was the last person to review Australia's tax system, agrees that the 50 per cent CGT discount was likely a key factor."

Dr Henry, who Janda refers to, explains that negative gearing and the capital gains tax concession go hand in hand.

"We have to talk about negative gearing," he said in an interview on ABC radio. 

"We have to talk about the capital gains tax concession, the fact that only 50 per cent of nominal capital gains are included in a taxpayer's income whilst they get full interest deductions.

"That's what negative gearing is all about."

Why is negative gearing controversial?

Because, as Janda points out, not all countries allow it.

Here's ABC business editor Ian Verrender on that:

"Negative gearing is controversial because, while it is standard practice to be able to write off business costs like interest payments against business revenue, in Australia, we go one step further.

"We allow those costs or losses to be written off against personal income."

Who is negative gearing good for?

It primarily benefits people who want to invest in property, Janda says:

"By allowing them to offset net losses against their other income and reduce their tax bill now, it allows investors to pay more for property than they would otherwise be able to if they had to wait and offset them against potential future rental profits.

"Advocates argue that negative gearing also boosts rental supply because it makes property investing more affordable and attractive."

Who is negative gearing bad for?

People who aren't investors who want to buy property.

Janda says this is particularly true for people looking to buy at the cheaper end of the market — so think first home buyers.

"They have to compete against people who not only tend to have higher incomes and more equity anyway.

"They're also up against people who also have an annual cashflow benefit from the tax refunds they can generate from deducting their interest payments and other costs against their taxable income."

Critics say it means working generation families can't afford to buy a house.

One of those critics is Dr Henry, who says the current system is causing "'tragic intergenerational inequity". You can listen to the full interview below: