This article was fact-checked and reviewed by Lloyd Edge, an accredited buyer's agent, licensed real estate agent and the author of Positively Geared. Content has been updated for 2024.
The ultimate goal of a property investor is to make a profit. You can make a profit from rental income, which is called positive gearing. But even if you're losing money month to month – meaning the cost of owning an investment property (interest costs and expenses) is more than the return you receive on through rental income – you can still be making a profit through capital growth.
You only benefit from the asset's growth in value if you sell it, but in the meantime, there are tax benefits known as negative gearing.
How negative gearing works
The Australian Tax Office (ATO) treats expenses incurred by property investors as tax deductible expenses, much like other business costs. While an investment property is supposed to generate income, there may be years where you spend more than you make in rent.
You could borrow money to buy an investment property, renovate the property and then cover a range of maintenance costs. There are also other expenses like property management, compliance, land tax, strata fees and insurance. If these total costs are more than the amount you receive in rent you are negatively geared.
You can offset this loss against the income you earn from other sources, and the end result is that the loss from your negatively geared property can be offset against your salary and other income. From the ATO's view, you are effectively earning less and therefore will pay less tax at the end of the financial year.
While common for property investing, negative gearing can also be used for other financial investments such as shares and bonds.
Negative gearing – a hypothetical example
- Ahmed buys a $600,000 investment property with a deposit of $100,000.
- He gets a loan for $500,000 from a lender.
- He collects $500 per week in rent, or $26,000 per year.
- The loan is an interest-only mortgage with a rate of 7.2%. The initial interest charges are $3,000 per month, or $36,000 per year.
- In the first year of owning the property, Ahmed spends $1,000 on maintenance, $2,000 in strata fees and $2,000 in property management fees, plus $1,000 on insurance.
- Together, these costs plus interest charges total $42,000. This is $16,000 more than he collects in rent.
Result: Ahmed is negatively geared by $16,000 a year and can deduct this amount from his taxable income.
How do I calculate my negative gearing loss?
To work out your negative gearing loss, you will need to follow these steps:
- Add up your property income. This will consist of the rent you collect from the property. Simply multiply the weekly rent by 52.
- Add up your property expenses. This includes interest payments on the mortgage, maintenance costs and property management fees. Don't forget property management expenses – they usually charge one full week's rent, plus GST, as the beginning of each new tenancy.
- Deduct depreciation. Depreciation is the loss you see from the decrease in value of the building and certain assets within the property. Examples of items you could depreciate would be carpets, drapes, hardwood floors and appliances. This is an "on paper" cost – you might be able to deduct $6,000 in depreciation, which doesn't actually cost you $6,000 in hard costs. But you can add this to your "costs" at tax time. Any amounts you depreciate are required to be factored in when you eventually sell.
A good accountant with property investing experience can help you manage your property tax obligations. You can also engage a quantity surveyor to set up a depreciation schedule to figure out the amount you can deduct for depreciation each year.
What investment expenses can you claim as a tax deduction?
Generally, you can claim a deduction for your expenses associated with the management and maintenance of an investment property, including the interest you pay on loans. If your asset is negatively geared, you may be able to deduct the full amount of rental expenses against your rental and other income, including your salary and wages.
You can claim mortgage interest, but you can not claim any amounts you pay towards the principal of the mortgage.
You may also be able to claim depreciation. As a general rule, property investors can claim deductions in 3 main categories:
- Revenue deductions. You can claim revenue deductions such as the interest on the money you borrow as well as ongoing maintenance fees.
- Capital items. Large items such as a plumbed-in dishwasher or carpets in a rental property are subject to depreciation over time and can be claimed over several years.
- Building allowances. Generally, you can claim for building allowances such as for depreciation over time or for building works.
You can visit the ATO website for a comprehensive list of deductible expenses.
Additional deductible expenses
- Body corporate fees
- Costs associated with borrowing (e.g. stamp duty and charges on your loan)
- The cost of advertising for tenants
- Insurance
- Fees and commissions charged by property agents
- Land tax
- Repairs and maintenance costs
- Interest you are charged on your loans and other bank fees
- Cleaning services
- Gardening and lawn mowing costs
- Pest control expenses
- Council and water rates
- Capital works costs
- Depreciation on plant and equipment
What are the risks involved with negative gearing?
Just like any investment strategy, negative gearing has risks. Borrowing money to fund an investment is risky in itself, and you should be fully aware of what negative gearing involves before you pursue this strategy. Consider the following risks before you commit to a negative gearing strategy:
- What if your income changes and you can no longer pay for the shortfall each month?
- What if you can't find a tenant and the property is left vacant for an extended period; how will you cover the costs of owning the property?
- What if the property market takes a dive and you don't achieve the capital gain you had planned?
- What if tax laws change and negative gearing is no longer as financially beneficial for your unique situation?
There are steps you can take to minimise the risks associated with negative gearing. The best way to minimise your investment risk is to do plenty of research when choosing your investment property and select a property that is likely to rise in value.
Make sure your income is high enough to cover interest repayments and maintain your investment property, even in less-than-ideal circumstances. Speak to the experts such as a financial planner, a tax accountant and a mortgage broker to ensure that you make a sound financial decision.
What place does negative gearing have in the Australian market?
Negative gearing has been a popular strategy for Australian investors for many years, but it's also a source of controversy.
The following are some of the arguments against negative gearing:
- It encourages property investment and reduces housing supply to home buyers (and increases prices).
- It benefits asset-rich investors over buyers, helping the rich get richer.
- It encourages risky investment.
The following are some of the arguments in favour of negative gearing:
- It's a modest fringe benefit for investors, many of whom are only on moderate incomes.
- It encourages investment in property and spurs housing construction.
- Removing it could raise rents (by raising investors' costs) and even hurt property prices by lowering investment.
It's a complicated topic, and experts commenting on negative gearing in the media often do so with the interests of a specific group in mind. The whole thing is further complicated by the fact that many Australians are property investors and many are both renters and investors.
More property investing guides and advice
- Property investing tax strategies. Negative gearing is a strategy property investors use to offset their short-term losses in the pursuit of long-term capital gains. This requires the ability to absorb some cash-flow losses, but a savvy investor can structure their property investment in such a way as to maximise its tax effectiveness.
- Capital gains tax. Another important piece of the negative gearing puzzle is the capital gains tax (CGT) concession. This allows investors who have held their property for at least 12 months an exemption on 50% of their CGT bill. Coupled with negative gearing, the CGT discount makes property an extremely tax-effective investment strategy. Learn more about minimising CGT.
- Getting your foot on the property investment ladder. While property might be a tax-effective and attractive asset class for investment, first-time investors can feel intimidated by the perceived difficulty of buying their first property. Before you wade into the world of property investment, there are some important investing strategies to keep in mind.
Hi there,
new to renting my home and trying to understand all areas of this.
In layman’s terms around the tax’s – should the rent l charge be higher or lower than my mortgage plus expenses of the property, to ensure l get a return a tax time please?
Hi Kellie,
There’s a range of factors that can influence your tax return and it’s not as simple as the rent you charge vs the income, because it depends on the value of your mortgage, your deductions and depreciation.
Generally, you will get a tax return if your expenses outweigh your income, but that’s not a good reason to charge less rent as you’ll end up even more out of pocket.
We would strongly recommend you get advice from an accountant with expertise in property investing to give you some personalised advice; there are things like depreciation and negative gearing that can significantly impact your tax position.
Hope this helps!
Hi,
In the situation when I can’t find a tenant for my investment property and the property is left vacant for an extended period, Are the repayments made during this period tax deductible?
Thanks,
Raghu
Hi Raghu,
Thanks for reaching out.
You can still claim expenses for your investment property, such as the interest on loans, as long as the property is genuinely available for rent.
According to the Australian Taxation Office (ATO), if a property is genuinely available for rent, it must be advertised to potential tenants and tenants must be reasonably likely to rent the property. For more details, please speak with a tax accountant or visit the ATO’s rental property expenses to claim guide.
All the best,
Belinda