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Negative gearing is when the cost of owning an investment property (interest and expenses) is more than the return you receive on your rental property (rental income). In other words, it's costing you to own the property. In Australia, property investors can use negative gearing to reduce their tax bill significantly.
It's a useful benefit, but it has become a controversial policy. Learn how negative gearing works, examine the risks involved and gain some strategies to maximise the profits from your investment property.
An investment property is negatively geared if the net rental income (after deducting expenses and depreciation) is less than the interest on the borrowed funds.
The outcome of a negatively geared property is that a net rental loss arises. You could borrow money to buy an investment property, renovate the property and then cover a range of maintenance costs. At the end of the financial year, you may discover that the annual rental income you generate from your investment is less than the expenses you incurred.
This is not good, obviously, but you can benefit from this loss by offsetting it against the income you earn from other sources. The end result is that the loss from your negatively geared property can be offset against your salary and other incomes, so 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.
Result: Ahmed is negatively geared and can deduct the difference from his taxable income.
To work out your negative gearing loss, you will need to follow these steps:
A good accountant can help you set up a depreciation schedule to figure out the amount you can deduct for depreciation each year.
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.
Depending on your circumstances, you may also be able to claim depreciation against the property's rental income. As a general rule, property investors can claim deductions in three main categories:
You can visit the ATO website for a comprehensive list of deductible expenses.
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:
However, 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.
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:
The following are some of the arguments in favour of negative gearing:
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.
Learn how a low rate home loan can see you still enjoy negative gearing benefits while making a positive income.
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