Insights · Property and lending
Negative gearing explained
Negative gearing is one of the most talked-about parts of Australian tax, and one of the most misunderstood. It can make an investment property more affordable to hold, but it isn’t a reason to buy one on its own.
What it means
A property is negatively geared when the costs of owning it, mainly the interest on the loan, are more than the rent it earns. That loss can be deducted from your other income, such as your salary, reducing your tax.
A property is positively geared when the rent is more than the costs. The profit is added to your income and taxed.
A worked example
Sam earns $110,000 a year and owns a rental property with a $600,000 loan.
| Per year | |
|---|---|
| Rent received | $28,600 |
| Loan interest | ($36,000) |
| Rates, insurance, agent fees, repairs | ($7,500) |
| Depreciation (capital works) | ($5,000) |
| Net rental loss | ($19,900) |
Sam’s taxable income falls from $110,000 to $90,100. At a 30% marginal rate plus the 2% Medicare levy, that saves about $6,370 in tax.
But look at the cash: Sam paid out $43,500 in interest and expenses and received $28,600 in rent, a shortfall of $14,900 (depreciation isn’t a cash cost). After the tax saving, Sam is still about $8,500 a year out of pocket.
That’s the point people miss. Negative gearing reduces a loss; it doesn’t turn it into a gain. The strategy only pays off if the property’s value grows by more than the after-tax losses over the years you hold it.
What you can claim
- Interest on the loan used to buy or improve the property
- Council and water rates, land tax, strata levies
- Landlord insurance
- Property management fees and advertising for tenants
- Repairs and maintenance (restoring something to its original condition)
- Depreciation on the building and eligible fixtures. See depreciation on new and established properties
- Accounting fees for preparing the rental schedule
What you can’t claim
- Travel to inspect or maintain a residential rental property (not deductible for individuals since 2017)
- Improvements as repairs. Renovations and additions are capital works, depreciated over time, not deducted all at once
- Initial repairs to fix problems that existed when you bought the property, which form part of its cost base
- Holding costs of vacant land you haven’t yet built a rental on
- Interest on money redrawn for private use, even if it’s the same loan. Deductibility follows how the money is used, not the property it’s secured against
Getting the benefit sooner
If you’re an employee, you don’t have to wait for a refund. A PAYG withholding variation lets the ATO reduce the tax taken from your pay to reflect the expected loss.
The risks
- Interest rates. A rate rise increases the shortfall you fund every month.
- Vacancies and unexpected repairs.
- Growth isn’t guaranteed. If the property doesn’t grow, you’ve paid to lose money.
- Capital gains tax on sale. If you’ve held it for more than 12 months, only half the gain is taxed, but it’s taxed at your marginal rate in the year you sell.
- Policy change. Negative gearing has been a political issue for years. The rules haven’t changed, but it’s sensible not to rely on any tax concession lasting forever.
Structure it properly from the start
Whose name the property and loan are in, keeping investment and private debt separate, and using an offset account rather than redraw all affect how much you can claim for as long as you own the property. Talk to us, and Judge Lending, before you buy. See investment loans and personal tax returns.