What is Negative Gearing?

Want to know how negative gearing works? Find out all you need to know about negatively gearing a rental property in this handy guide.

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, updated on August 7th, 2023       

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You may have heard the term ‘negative gearing’ in investment circles before, but not known what it meant. If you’re looking to purchase investment property, it’s certainly worth learning about, as it comes with several key benefits for investors that can help you save money.

Securing the right investment loan is a crucial part of the negative gearing process, which is why you can find and compare a range of home loan offers with Savvy. Find out more about negative gearing, how it works and how it can benefit you before you choose your mortgage deal.  

What is negative gearing?

The word ‘gearing’ means to borrow money to invest, whether that be in property, shares or other forms of investment.  ‘Negatively geared’ in property terms means that your investment property’s rental income earns you less than the cost of your mortgage repayments.   This creates a loss which can be claimed as a tax deduction against your other income, resulting in overall tax savings.

If you know your investment property is going to make a loss, you can apply to the Australian Tax Office (ATO) for a PAYG (Pay As You Go) Withholding Variation.  This gives your employer permission to take out less tax, resulting in more money in your pay packet on a fortnightly or monthly basis.

An example of negative gearing:

  • Chris owns a two-bedroom apartment in Melbourne which he rents out for $400 a week, meaning his tenant pays $20,800 in rent per year.
  • He pays council rates and Strata Title fees plus a property manager to find tenants and do an inspection once every 3 months. These additional expenses add up to $5,000 per year.
  • The cost of his investment loan is $20,000 p.a., so it costs him $25,000 p.a. overall to own his investment. As he receives $20,800 p.a. in rent, his investment results in a net loss of $4,200.
  • Chris can claim this amount as a deduction from his income, which means he has less income to pay tax on.

If you normally earn $123,000 a year, for instance, you would be liable to pay $30,577 in tax in Australia.   However, if your negatively geared property costs you $5,000 per year to own, this would reduce your overall income to $118,000 a year, meaning that you’d pay $28,817 in tax, saving you $1,760 a year.

As well as reducing the amount of tax you pay, you will also own an asset which will increase in value over the years, so not only are you saving tax, but you’re increasing your overall net assets.

In contrast, a positively geared property is the reverse – the cost of borrowing your funds is less than the rent you receive, so your investment puts money back into your pocket.

Savvy can help you make the best choice when choosing an investment loan by comparing and showing you the best products offered by our lenders.  You should always seek specialist advice from your tax agent or financial advisor when calculating the cost of owning a negatively geared property.

What tax deductions can I claim on my rental property?

There are standard deductions you’re able to claim as expenses on an investment property when you are negatively geared.  However, the ATO can change the eligibility of certain deductions from year to year, so it’s best to get expert advice on this matter. You can claim the following as tax deductions on your rental property: 

  • All investment loan costs (including interest and lender fees)
  • Strata Title and Body Corporate fees
  • Land tax, council and water rates
  • Landlord and building insurance
  • Repair, maintenance and improvement costs 
  • Property agent fees, includingthe cost of advertising for tenants
  • Cleaning, grass mowing and pest control 
  • Depreciation on the building and household appliances
  • Accountant’s fees

Top tips to minimise risk and maximise profit when negatively gearing

Buy your rental property carefully

Choose a low maintenance rental property that will remain attractive to potential tenants in an area close to schools, public transport and shops.  This way you’ll always have tenants willing to rent.

Look for capital growth properties

Receive advice regarding which properties have high capital growth potential.  Try to think what the area will look like in five, ten or 15 years and buy a property where people will want to live in the future.  An expansion of a railway line or the creation of a new national park can create opportunities to buy where people want to move to.

Make sure you have spare cash

Allow yourself some free cash flow in case interest rates rise over the life of your loan or you’re suddenly hit with an unexpected bill.  It may not be worth the trouble to own an investment property if it means you’re not fully comfortable with your personal finances.

Pay off your investment loan as soon as you’re able

Start paying off the principal and interest on your investment property loan as soon as you’re able, as you’ll slash the amount of interest that you’ll be liable to pay overall.  Interest-only home loans ensure that up to 100% of your repayments are tax-deductible, but your actual loan amount remains untouched during that period. Without any increase in property value, you won’t be able to build equity, which can work against you if you end up looking to sell. 

Frequently asked questions about negative gearing

What’s best – negative or positive gearing?

This will largely depend on your financial circumstances.  Negative gearing is most suitable for those on a higher income and sufficient disposable income who wish to reduce their payable tax.  Positive gearing may suit first-time investors who wish to generate a small second income and benefit from capital growth over the life of the investment.

What are the risks of negative gearing?

You’ll benefit from paying less tax and achieve capital growth, but if house prices fall and interest rates go up, your tax benefits may be swallowed up by rising ownership costs. 

How can I maximise the tax benefits of my negatively-geared property?

You can maximise your tax benefits by claiming every tax offset permitted under Australian taxation law.  By reading about permitted tax offsets, you’ll be in a better position to ensure you’re claiming all possible items.  If you’re not sure what you’re entitled to claim, ask your accountant for a detailed list of permitted tax offset deductions.

If I own a negatively geared investment property with my partner, who gets the tax benefits?

If you own an investment property with your partner, you’re entitled to claim 50% of the tax deductions against each of your incomes.  Tax benefits are allocated in direct proportion to the percentage of ownership of an investment property.

Is there a standard way to calculate negative gearing?

No – there is no simple formula to calculate the tax benefits derived from negatively gearing an investment property.  It all depends on your household income, which income tax bracket you’re in and how much tax you pay.

When does a negatively-geared investment property become positive?

As you pay down your loan, there will come a time when the rent you receive from tenants in your investment property is more than the cost of your mortgage. When this happens, your property becomes positively geared.

Am I able to negatively gear property outside of Australia?

Yes – you can still claim losses from investment property overseas against your Australian income. However, the income you receive from overseas investments will be taken into consideration when the ATO assesses your individual situation, so it can affect the tax benefits you receive from Australian-based property. You should speak to your accountant or receive professional advice on how to approach negative gearing for overseas property.

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