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If you’re looking into property investment, you’ve probably heard the term “negative gearing” thrown around. But what’s in it for you? And is it a strategy worth considering in today’s market?
This guide will explain negative gearing, how it works, the tax benefits, how to calculate it, the pros and cons of negative gearing, and whether it might be right for your investment goals. Let’s start by answering the key question: what is negative gearing?
What Is Negative Gearing?
Negative gearing happens when the expenses of an investment property costs more than it yields. These costs include loan interest, property management fees, insurance, maintenance, and council rates. In simple terms, you’re at a loss.
This might sound counterintuitive – why would anyone intentionally lose money? The answer lies in two key benefits: tax advantages now and potential capital growth later.
That loss can be claimed against your other income, reducing your tax. Meanwhile, if the property increases in value over time, the eventual profit when you sell could far outweigh those short-term losses.
How Negative Gearing Applies to Investment Property
Many Australian investors use a negative gearing investment property strategy. They borrow money to buy a property knowing the rent won’t cover all expenses initially. The strategy banks on both the property value and rental income gradually increasing over time.
It’s important to understand that negative gearing isn’t about making quick money. It’s a long-term strategy focused on building wealth gradually while enjoying tax benefits along the way.
Why Investors Use Negative Gearing
With negative gearing explained, let’s understand why it’s so popular among investors. There are several solid reasons:
- Tax Benefits: A key advantage is the negative gearing tax deduction. Those property losses can directly reduce your taxable income, potentially saving you thousands in tax each year.
- Growth Potential: Smart investors target properties in areas showing signs of growth. If the property value increases significantly, the final profit on sale can outweigh the ongoing losses.
- Building Your Portfolio: Borrowing lets you acquire properties that might otherwise be out of reach.
- Spreading Your Risk: Investors can diversify their assets more easily by borrowing. This spreads risk and opens up access to different markets.
- Fighting Inflation: Property values and rents tend to rise with inflation. Over time, the investment becomes more manageable as income increases.
How Negative Gearing Affects Your Tax
What You Can Claim
The Australian Taxation Office (ATO) allows you to claim a wide range of property-related expenses if your investment is negatively geared. These include:
Interest and Maintenance Costs
You can often claim 100% of the loan interest paid, provided the property is available for rent.
You can also claim costs needed to keep your property in rentable condition, including:
- Fixing plumbing or electrical issues
- Pest control
- Servicing essential equipment
- General property upkeep
Professional Services and Depreciation
Additional deductions include:
- Property management fees
- Accounting and tax preparation costs
- Legal expenses related to property management
- Depreciation on the building and fixtures
Depreciation is particularly valuable. Even though it’s a non-cash deduction, it can significantly reduce taxable income.
Tax Implications Over Time
Offset Strategies
When your property runs at a loss, that shortfall can be used to reduce your taxable income from other sources, such as your salary or business profits.
For example, if you earn $100,000 from your job and your property generates a $10,000 loss, you’ll only be taxed on $90,000. For someone in the 37% tax bracket, that’s a tax saving of $3,700.
However, this benefit only applies if your other income is enough to offset the losses. Many investors combine this with a long-term holding strategy. This allows the property to gain value while reducing tax liabilities in the short term.
Capital Gains Considerations When Selling
The end game for most negatively geared investments is selling the property for more than you paid. When this happens, you’ll likely face Capital Gains Tax (CGT).
The good news is, if you’ve held the property for more than 12 months, you’ll qualify for the 50% CGT discount. In many cases, the later returns usually balance early property losses.
A good strategy includes planning your exit – meaning you calculate your likely CGT in advance. It includes thinking about when to sell, depending on income levels and market trends.
How to Calculate Negative Gearing
A Simple Walkthrough
Understanding how to calculate negative gearing impacts will help you make informed investment decisions:
Estimating Rental Income vs Property Expenses
Start by listing your expected annual rental income. Then compile all your annual expenses:
- Mortgage interest (not principal repayments)
- Property management fees (typically 7-8% of rent)
- Insurance premiums
- Council and water rates
- Strata fees (for apartments)
- Realistic maintenance allowance
- Land tax where applicable
- Depreciation allowances
Make sure your estimates are realistic. Research comparable rental properties in the area. This will give you a solid benchmark.
Identifying the “Loss” That Creates a Deduction
When your expenses exceed your rental income, the difference is your deductible loss. This amount directly reduces your taxable income from other sources.
Let’s look at a simple example:
- Annual rental income: $24,000 ($500/week × 48 weeks, allowing for some vacancy)
- Total annual expenses: $32,000
- Net deductible loss: $8,000
For an investor in the 37% tax bracket, this $8,000 deduction represents approximately $2,960 in tax savings.
Repeat this process annually to monitor performance. Consider modifying your approach if losses keep increasing.
Tools to Help You Crunch the Numbers
Several tools can help you assess negative gearing scenarios:
1. Negative Gearing Calculator
Quickly estimate your potential losses and tax savings. Enter income, loan, interest, and rent to calculate your net position and tax impact.
2. Advanced Rental Income Calculator
Advanced Rental Income Analyser is a user-friendly tool that helps visualise cash flow. It also shows tax implications across multiple years. Useful for comparing different properties side by side.
You can also work with a property investment advisor. Many of them use custom tools to build in-depth forecasts that factor in depreciation, rent growth, and inflation.
Is Negative Gearing Worth It Today?
With negative gearing explained, it’s time to take a closer look at the pros and cons, and ultimately ask– is negative gearing worth it?
Benefits of Negative Gearing
Despite ongoing policy discussions, negative gearing continues to offer significant advantages for well-positioned investors.
Tax Relief and Long-Term Growth
The combination of tax benefits of negative gearing and potential capital growth creates a powerful wealth-building mechanism.
You might see paper losses each year. But the capital gains can outweigh that when you sell. This approach works particularly well in stable or rising market conditions.
Leverage Without Huge Upfront Cash
You don’t need to save hundreds of thousands to invest. By leveraging borrowed money, you can own a high-value asset earlier than you otherwise could.
This makes it easier to enter the market sooner. It also gives your investment more time to grow.
Cons of Negative Gearing
Cash Flow Shortfalls and Rising Rates
A negatively geared property drains your personal income. The strategy also makes you vulnerable to interest rate increases. As rates go up, your negative cash flow worsens, requiring larger contributions from your own resources. This stretches your budget tighter each month.
You may also face periods of vacancy. Without a tenant, you’ll have to cover all expenses yourself.
Market Uncertainty and Policy Changes
The strategy fundamentally depends on property values increasing over time. But, there’s no guarantee of that.
Government policy shifts can also impact your expected property investment returns. This includes changes to tax concessions.
Smart investors develop contingency plans for possible legislative changes that might impact returns.
What to Consider Before Using This Negative Gearing Strategy
Does It Suit Your Financial Situation?
Negative gearing isn’t for everyone. It works best for:
- Investors with stable, substantial income from other sources
- Those with healthy cash reserves to manage increased contributions if needed
- People focused on long-term wealth creation rather than immediate income
- Individuals seeking tax-efficient investment structures
You should honestly assess your cash flow position before jumping in. Stretching your finances too thin creates vulnerability to interest rate rises or unexpected expenses. Always have a financial buffer.
The strategy also requires patience. Markets rise gradually, so plan for a decade-long hold.
Positive Gearing or Negative Gearing
Positive gearing means your property earns more than it costs to maintain. It puts money in your pocket from day one.
Positive gearing reduces financial pressure bringing in positive cash flow. This approach suits risk-averse investors, retirees needing income, or those with limited capacity to cover property shortfalls.
And by now you know what negative gearing is. It appeals to investors who can manage temporary cash flow deficits.
Both strategies have merit depending on your financial position, risk tolerance, and investment objectives. Many successful investors include both approaches in their property portfolios to balance growth and income.
Conclusion
Negative gearing can be a powerful wealth-building strategy when implemented thoughtfully. Success requires careful financial planning, property selection, and ongoing management.
The negative gearing investment property strategy works best for investors who:
- Have sufficient income to make negative gearing tax deductions worthwhile
- Can comfortably manage the cash flow requirements
- Choose properties with strong growth fundamentals
- Commit to professional property management
- Take a long-term investment perspective
Before you make a move, speak with a qualified tax advisor or buyer’s agent. Choose someone who understands your goals.
At InvestorKit, our data-backed approach has helped countless clients make informed, strategic decisions. These decisions align with their financial future.
If you’re exploring the idea of building wealth through negative gearing investment property, try our free advanced rental income calculator now. Take the next step with confidence.
References
[1] – Savings.com.au – Negative gearing explained for Australian property investors
[2] – Commbank.com.au – What is negative gearing?
[3] – Ato.gov.au – Depreciating assets in rental properties
[4] – Treasury.gov.au – Government insights and review on negative gearing
[5] – Duotax.com.au – Investment property tax guide for Australian landlords