Written by James Hurwood
Reviewed by Stephen Zeller
Last updated 14/11/2023
Negative gearing can be a real boon for property investors in Australia, but it’s not without its risks. Our General Manager of Money, Stephen Zeller has a few tips for anyone thinking of utilising negative gearing:
Being in a negatively geared position can be a daunting prospect for a first-time investor, but it’s extremely common, especially in a period when interest rates are quite high. When considering purchasing an investment property and potentially being in a negatively geared position, it’s best to discuss with your financial planner or accountant about what this may mean for your day-to-day cash flow and your expected return.
Although we ask for advice from our accountant/financial planner when reviewing negative gearing, take the time to understand the advice being given by the professionals and crunch the numbers yourself. By knowing the math, this can give you an idea of what properties to consider purchasing as an investment in the future.
When purchasing a property, as well as considering negative gearing, you should also think about capital growth. Although the rental income for one property might not be as high for another property, the property receiving less income and being more negatively geared may end up being worth more in the future compared to the property which was closer to being positively geared in the first place. This is a common scenario when looking at an apartment versus a standalone home, where the home has potential to renovate and improve the value in the future.
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.
So, in order to determine the direction in which your investment property is geared, you’ll need to compare the amount of rent money it makes you and the amount you spend on insurance, mortgage repayments and other essential property expenses (basically, the 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 by owning and maintaining the property (e.g. mortgage repayments, home insurance premiums).
If your investment property is negatively geared, the loss you make on it in any given financial year can be typically 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 at tax time.
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:
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 will 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
According to the ATO, there are three different categories of rental expense:
Negative gearing is a tax strategy designed to work in specific circumstances, meaning it can benefit you if applied appropriately but comes with a fair amount of risk that you’ll want to be aware of before making any firm commitments.
Keep in mind that the following pros and cons are broadly relevant to situations in which negative gearing is an appropriate and suitable strategy. They may become less applicable or relevant if a negative gearing strategy isn’t suitable for you.
It may benefit you to 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.
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Home Loan Specialists, and reviews and contributes to Compare the Market’s banking-relating content to ensure it’s as helpful and empowering as possible for our readers.
¹Australian Taxation Office. Rental expenses to claim. Accessed June 2023.
²Australian Taxation Office. How to claim a tax loss. Accessed June 2023.
³Australian Taxation Office. Rental expenses you can claim now. Accessed June 2023.
⁴Australian Taxation Office. Rental expenses you claim over several years. Accessed June 2023.
⁵Australian Taxation Office. Rental expenses you can’t claim. Accessed June 2023.
