You’ve probably heard this question—“What is negative gearing?”—before. Understanding it helps investors make informed and strategic property decisions. Read on to learn more on this and how you can take advantage of it.
What Is Negative Gearing?
Negative gearing is a strategy where the expenses of an investment property exceed the income it generates. The shortfall, or rental loss, can often be claimed as a deduction against other income, such as salary. This reduces taxable income, which may result in a lower tax bill for the property investor.
In Australia, negative gearing is a form of tax planning that has been widely adopted by investors. It can make owning an investment property more appealing due to the potential tax benefits. However, it’s important to note that you’re still making a loss in the short term—something not suitable for every financial situation.
How Does Negative Gearing Work?
Gearing is when you borrow money to invest. With negative gearing, the cost of interest, maintenance, and other expenses exceed the rental income. This creates a loss on an investment property, but that loss can be used to reduce their tax burden by offsetting other income.
Let’s say your interest repayments, property management fees, and upkeep cost more than your net rental income. That means your property is negatively geared. You’ll still need to cover the shortfall out of pocket, but the Australian tax system may allow you to deduct this loss from your income earned.
Why Do Property Investors Use Negative Gearing?
For many, the ability to use negative gearing is a long-term investment strategy. While they make a loss upfront, the potential for future capital gain makes the short-term cost worthwhile. This approach is common when investors believe the value of the property will grow significantly.
Additionally, some use it to minimise the amount of personal income tax they pay each year. Because the losses reduce taxable income, it can help investors in higher marginal tax rate brackets manage their overall tax payable. That said, this strategy does require strong financial discipline.
What Is a Negatively Geared Investment?
A negatively geared investment is one where the ongoing costs—including mortgage, maintenance, and fees and charges—exceed the property income. The investor must cover the difference, often hoping that eventual property growth will result in a solid capital gain.
This type of strategy isn’t always for everyone. If your cash flow is tight, managing a negatively geared property can become stressful. You should always weigh your capacity to handle the shortfall over time, and consult a registered tax agent for professional guidance.
Understanding Negative Gearing and Tax Benefits
In the Australian tax system, negative gearing helps reduce your taxable income. The tax treatment allows investors to offset their rental loss against their total earnings. This lowers the rate of tax you pay overall, which is appealing to high-income earners.
Additionally, property owners can claim tax deductions for interest, repairs, and costs of owning the property. However, these benefits depend on accurate record keeping and legitimate expenses. Always seek professional tax advice to ensure you’re using this strategy correctly.
Negative Gearing and Capital Gains Tax
Eventually, many investors hope to sell the property at a profit. When this happens, any profit is considered a capital gain, and it becomes subject to capital gains tax. However, there are ways to reduce the amount you’ll need to pay.
The capital gains tax discount allows eligible Australian residents to halve the capital gains tax payable if the property is held for more than 12 months. This capital gains tax concession complements the benefits of negative gearing, making it a compelling long-term approach for some.
What Is the Capital Gains Tax Discount?
The capital gains tax discount is a reduction applied to individuals and trusts when they realise a capital gain on certain assets, including residential rental property. Investors who hold the asset for over a year may receive up to 50% off the tax payable on the gain.
This discount works in tandem with negative gearing strategies. While you may make a loss each year through negatively geared ownership, your profit on sale can be significantly boosted by this concession. It’s a key part of investing in property in Australia.
Can You Use Negative Gearing on Any Investment Property?
Generally, yes. Most rental properties in Australia can be negatively geared, provided the costs exceed rental income and the investment is genuinely intended to generate income. That includes houses, units, and even some holiday rentals, depending on usage.
However, the rules are strict. The Australian Tax Office expects the property to be available for rent, and not purely a holiday home. Any attempt to misuse the deductions could lead to penalties. That’s why expert advice is crucial when buying an investment property.
Is Negative Gearing Worth It?
That depends on your goals and financial situation. If you’re aiming for long-term capital gain, and can afford the ongoing repayment gap, negative gearing could align with your objectives. But it’s not without risks—property values may not rise as expected.
Importantly, some question whether negative gearing benefits the rich disproportionately. It’s often a controversial political issue in Australia, especially during election cycles. Still, for the right property investor, it can offer a strategic way to build wealth over time.
What Is Positive Gearing?
In contrast, positive gearing occurs when your rental income exceeds your property’s expenses. In this case, the investment is positively geared, and you’re earning a profit while still holding the asset. However, this profit is subject to income tax.
Because a positively geared investment increases your taxable income, you may end up with a higher tax bill. Still, the immediate cash flow can be beneficial, especially for those seeking regular income from their geared property rather than long-term growth. Learn more about positive gearing here.
Positive and Negative Gearing: What’s the Difference?
The main difference lies in cash flow. With positive gearing, you’re generating extra income. With negative gearing, you’re funding a shortfall in the hope of future gains. Both approaches can work depending on your financial position and the market cycle.
Ultimately, understanding positive and negative gearing helps determine which strategy best aligns with your goals. Whether you’re building a portfolio or purchasing your first home as an investment, knowing your numbers matters.
Taxation Considerations for Geared Investment Strategies
The taxation implications of gearing are essential to consider. You need to report both income and expenses accurately, and follow tax law guidelines. That includes understanding your tax rate, allowable deductions, and when you may be liable for capital gains tax.
The type of gearing strategy you choose—positive or negative—affects how much tax you’ll pay each year. It’s essential to consult a registered tax agent or financial advisor who understands gearing strategies to make informed choices.
The Debate Around Abolishing Negative Gearing in Australia
Fairly recently, there’s been discussion about abolishing negative gearing or changing how it applies to future purchases. This debate intensified during the 2019 election, when it became a controversial political issue in Australia.
An analysis found that negative gearing in Australia provides the greatest benefit to higher-income earners. While negative gearing continues, any future reforms could affect how Australians invest in property. Stay informed and review your investment plans accordingly.
Common Mistakes to Avoid When You Negatively Gear
Many investors overlook cash flow requirements. Even if a property is negatively geared, it still requires regular repayments, maintenance, and holding costs. Failing to budget properly can lead to financial stress.
Another common issue is claiming ineligible expenses. To avoid ATO issues, make sure you only claim valid deductions for tax purposes. Speak with a registered tax agent to ensure compliance with Australian tax rules.
How Kaleido Loans Helps You Make Smarter Property Investment Choices
At Kaleido Loans, we simplify the complexities of property investing. Whether you’re exploring negative gearing, learn more about property investment loans, or growing your portfolio, our expert brokers are here to help. We offer guidance tailored to your financial goals, not one-size-fits-all advice.
We assist clients across Sydney—CBD, Western Sydney, and the Inner West. Our team is legally bound to act in your best interests, ensuring transparent and trustworthy service. Ready to align your investment strategy with your future plans? Let’s talk.
