What is negative gearing?

In the context of real estate and property investing, gearing is essentially a way of expressing whether you’re making a profit or a loss on your investment property, based on the amount of money you’re having to regularly spend on said property.

So, in order to determine the direction in which your investment property is geared, you’ll need to compare the amount of rental income you receive against the amount you spend on insurance, interest and other ongoing costs of owning a home.

If your property is neutrally geared, it means your expenses and income are on par, and you’re breaking even on your investment. As with positive gearing, neutral gearing doesn’t offer any tax benefits or deductions – it just means you’re not making or losing money through your investment property.

A property is considered to be ‘positively geared’ if the rental income you receive from it outweighs the expenses you incurred as a result of owning the property in any given financial year.

While a positively geared property doesn’t help you minimise your tax for the year, it means you’re making money, not losing it. For some people, this beats an end-of-year tax deduction.

If your rental income outweighs your expenses, your property is positively geared. If your expenses outweigh your rental income, your property is negatively geared.

Having a negatively geared investment property means your rental income is less than the sum of the expenses you incur as a result of owning and maintaining the property (e.g. interest costs, home insurance premiums).

If your investment property is negatively geared, the loss you make on it in any given financial year can potentially be used to offset your total taxable income, reducing your income tax payable for the financial year.¹

So, while negative gearing means losing money in the short term, it can be an investment strategy worth considering if your priority is paying less when it comes time to pay tax.

The ATO states that if you own an investment property (i.e. a property currently being rented out or currently available for rent), you’ll generally be able to claim a deduction for any expenses you incur in relation to the property’s ability to produce income for you.¹

These expenses could include:

• Interest repayments made towards your home loan
• Maintenance for the property (including repairs)
• Household bills you pay for the rental property (e.g. council rates, water charges, home insurance).

You may possibly be able to also claim the cost of depreciating assets (i.e. items that wear out over time, like refrigerators or timber floors), expenses related to borrowing money that was put towards the property, property management costs and more.

If you tally up your expenses and rental income for the year and determine that you’ve made a loss on your investment (and you have a negatively geared property as a result), you’ll generally be able to claim a tax deduction for all of your property-related expenses for the financial year.

If your taxable income for the year is smaller than the tax savings you receive as a result of your property being negatively geared, you may be able to carry forward the difference to be offset against your taxable personal income in the next financial year.²

Investment property expenses that you can claim now (i.e. in the same year you incur them) include:³

• Interest expenses
• Advertising fees
• Body corporate fees and charges
• Council rates
• Water charges
• Land tax
• Cleaning
• Pest control
• Insurance
• Property agent fees
• Repairs and maintenance costs.

These include:⁴

• Certain borrowing expenses (including investment loan establishment fees, mortgage broker fees and valuation fees)
• Capital expenditure on renovations/improvements to the property
• Depreciation of assets.

These expenses include:⁵

• Certain borrowing expenses (e.g. your owner occupied home loan repayments, associated interest expenses and any personal expenses related to the property)
• Second-hand or used depreciating assets
• Expenses that your tenants paid, such as utility bills
• Costs associated with acquiring or disposing of the property, such as stamp duty.

• Short-term tax deductions. Negative gearing can potentially help you pay less tax (and potentially receive a larger tax return) in any given financial year by letting you offset your net rental losses against your taxable income.
• Longer-term tax benefits and capital growth. If you’re looking to eventually positively gear or sell your property for a profit, negative gearing can help to compensate for current losses while you hold out for future gains. Don’t forget about Capital Gains Tax though!
• Invaluable in lower-rent markets. Your property can still end up negatively geared if you can’t charge as much rent as you’d like to due to the current state of the property market. If you find yourself in this scenario, negative gearing could be a handy tool for swinging your losses to your own advantage.

• Negative cash flow. A loss is still a loss, regardless of any tax concessions you receive as a result. So, if a positive cash flow is crucial to you, negative gearing may not be suitable for you.
• Compromised borrowing power. Negative cash flow means less money in your pocket, and subsequently less money to borrow with. This means choosing to utilise negative gearing as a tax strategy could hinder your borrowing power and subsequently your ability to grow your investment portfolio – if that’s something you’re looking to do either now or in the future.
• Leaves you open to risk. If your rental income dries up or you incur significant property-related expenses, your reduced cash reserves may mean that you could potentially default on your home loan repayments or otherwise compromise your financial wellbeing.

You should consult with an accountant or financial adviser who can speak with you about the appropriateness of negative gearing for your current financial circumstances and priorities. They may be able to help clarify the specific tax laws surrounding negative gearing, and help you make a more informed decision about your financial strategy going forward.