Negative Gearing Australia - Overview

Negative gearing is a popular yet controversial investment strategy in Australia.

Your property is negatively geared if your revenue (after expenses) is lower than the interest that you are paying to finance the property. 

A net rental loss is the result of a negatively geared property. You may apply for a loan to purchase an investment property, renovate the unit, and pay for maintenance costs. 

You may discover at the end of the year that the rental income you generate from your property is lower compared to the expenses you incurred.

Negative Gearing Case Study 

Albert purchased a six-unit apartment building worth $800,000 with a deposit of $200,000. He applied for a $600,000 mortgage loan with an interest rate of 4.2% and initial interest or $2,050 monthly or $25,200 annual.

He charges $600 weekly rent or a total of $31,200 per annum. In the first year of operation, Albert spent $2,000 on mortgage insurance, $4,000 in management fee, $4,200 in strata costs, and $2,000 for other upkeep expenses. 

In total, the maintenance cost on top of interest charges reached $37,400, which is higher than the rental income he received. 

In this example, Albert’s rental property is negatively geared so he may apply for tax deduction from his taxable income. 

Risks of Negative Gearing Strategy  

Financing an investment property has its inherent risks, and you must be completely aware of what negative gearing involves before you try this investment strategy.

Here are the risks that you need to know before you use negative gearing as your approach: 

  • Cash flow shortage
  • Property market crash
  • High vacancy rates
  • Inability to service loan payments
  • Reforms in taxation

But there are steps that you can follow to reduce the risks associated with negative gearing strategy.

Do your due diligence in selecting your investment property and choose a property that has high potential to increase its value over time. 

Before You Use Negative Gearing As An Investment Strategy

Bear in mind that negative gearing is a risky and controversial investment strategy, so you need to carefully plan your strategy before you follow this path.

Ideally, you should work with an investment advisor to reduce the risks and maximize your capital growth. 

Frequently Asked Questions

What is negative gearing in real estate?

In property investments, negative gearing refers to the expenses and interest payments are higher compared to the rental income. To put it simply, the investor is losing money.

In Australia, real estate investors may lower their tax obligation significantly if their properties are negatively geared. 

Tax deductions are beneficial for property investors, but it is one of the most controversial policies in the Australian real estate market. 

How to calculate loss in negative gearing?

Here are the steps to compute negative gearing loss:

  1. Get the total of all the annual income you received from your property including rent and other amenities. 
  2. Get the total of all the expenses incurred for the whole financial year including interest repayments, upkeep costs, management fees, and other expenditures. 
  3. Take away depreciation which refers to the loss of property’s value and specific assets in the property. Furniture, appliances, carpets, and other fixtures can be included in the depreciation cost.

A professional accountant can assist you to establish a depreciation schedule to determine the amount you can take away for annual depreciation. 

What are the expenses you can claim a tax deduction?

You may claim a deduction for all costs associated with the management and upkeep of an investment property. This includes the interest repayments.

If your property is negatively geared, you may take away the total of rental costs against the income. But salary and wages are no longer deductible starting 1 January 2020.

In general, you may claim revenue deductions, capital costs, and building fees. 

Can you still negatively gear in Australia?

From 1 January 2020, you may not be allowed to write off your losses against the tax you pay on salary or wages if you purchase an existing unit.

Negative gearing is still available in Australia for newly built residential units and the policy is not yet backdated.

Therefore, you can still negative gear your property.

Talk to a Property Investment Advisor Today 

TENX Wealth Australia has a team of investment advisors who can help you determine if negative gearing is the right strategy for you.