## What is negative gearing?

Ah, negative gearing. It’s a staple of the Australian taxation landscape and a point of contention between many economic commentators. But let’s start at the start.

A negatively geared property is one that isn’t turning a profit, but with which the losses are offset against an investor’s taxable income.

Say, a person might receive \$20,000 of rental income in a given year, but pays \$25,000 to upkeep their investment property. Since they’re realising a loss, they can deduct that \$5,000 from the taxable income they receive from their day job, or brought in by another positively geared (read: profitable) investment.

## How to calculate the tax implications of your negatively geared property

Calculating the impact of negative gearing on the tax owed by a property investor is complex.

Not only does it involve tallying up all the income and expenses involved with the property,  it also depends on an investor's other taxable income, which would help determine the marginal rate at which they are taxed.

From financial year 2024/25, annual personal income of between \$45,000 and \$200,000 will be subject to a 30% tax rate. Until then, the nation’s tax brackets will be a little more complex.

To calculate the impact of negative gearing on your taxable income, you can add up all the eligible expenses incurred in a tax year and subtract any rental income earned, then remove the resulting figure from your taxable income before assessing how much tax you might be liable to pay based on your marginal tax rate.

Or, you could simply plug in the details of your income and your investment property into the calculator above and Savings.com.au will do all the work for you.

## The benefits of negative gearing

As the saying goes, there are only two guarantees in life, and one of them is taxes.

For most of us, the weeks or months leading up to the end of each tax year leaves us scrambling to minimise the tax we’re liable to pay. After all, a dollar saved is a dollar earned.

If you realise a loss on your investment property, you can deduct the amount you lose from your taxable income. Depending on how much income you realise in a given year and the size of the loss you’ve borne, negative gearing could reduce the income tax you need to pay by a considerable margin.

## What expenses can be considered when negative gearing?

It could be faster to list out the expenses that can’t be considered when negative gearing.

Negative gearing takes into account both regular and irregular expenses. For instance, council rates, property management fees, and depreciation can all be deducted as part of negative gearing. As can repairs, unexpected maintenance costs, and advertising fees.

Investors can also depreciate the value of the fixtures and fittings (called plant and equipment in taxation land), as well as wear and tear on the building itself (called capital works).

On the other hand, the cost of the actual property can’t be deducted, nor can the portion of home loan repayments that go towards paying down a mortgage’s principal balance. However, the interest portion of mortgage repayments can be considered.

Partly for that reason, many property investors opt for interest only home loans.

They then might use the cost of the interest, as well as other costs, to negatively gear the property. Then, when it comes time to sell, they might hope to realise a profit on the sale.

Of course, an investor can only offset their income to the value of the amount of money they lost, not the money they spent, in a given year.

Thus, if an investment property brought in \$15,000 of rental income and cost \$16,000 to own, an investor would be able to realise a tax deduction of \$1,000, not \$16,000.

Here’s a short, non-exhaustive list of expenses that may be able to be considered when negative gearing:

## Is negative gearing a sound long-term investment strategy?

Most investment properties don’t turn a profit in the early days of ownership.

However, as time goes on, the value of property typically increases, as does the rental income. So, it might be the case that an investor buys a property knowing they will initially make a loss on their investment.

Over the long term, though, rarely do experts suggest negative gearing as a good long-term investment strategy.

For starters, an investor taking part in negative gearing is, by definition, making a loss on their investment.

Take the above example, wherein an investor could negatively gear \$1,000.

Come financial year 2024/25, and assuming said investor earns upwards of \$45,000 and less than \$200,000 of taxable income, their loss would only save them from paying approximately \$333 of tax. The other \$666 would be their loss to bear.

For that reason, negative gearing is rarely a sound long-term investment strategy, and can be a big hit to cashflow. Rather, it’s designed to encourage investment in property by minimising potential losses.

That’s not to say some don’t use it as a long term investment strategy.

No doubt, there are punters out there hoping the losses they’re realising today will be dwarfed by the capital gains they might make when they sell their investment property. And depending on the size of the loss realised each financial year, they might find it a worthwhile strategy.

However, such a strategy is risky, as it depends on the value of a property increasing over time, and no investment is guaranteed to provide a return.

Interest charged on your debt might rise or fall over time, which can affect your deductions - a higher interest rate means you can deduct more, but is also a negative from a cashflow standpoint as you’re paying more.

## Where can I go to get help or advice on negative gearing?

Like the majority of tax-related topics, understanding negative gearing can be, well, taxing. It’s a complex subject with dozens of ‘if’, ‘buts’, and ‘maybes’.

If you’re unsure about anything negative gearing or tax related, you can check out the Australian Taxation Office (ATO) website or speak to a qualified, independent accountant or tax expert.

## Looking for a home loan?

Buying a home or looking to refinance? The table below features home loans
with some of the lowest interest rates on the market for owner occupiers.

Lender

Variable
Online ExclusiveUp To \$4K Cashback
• Immediate cashback upon settlement
• \$2,000 for loans up to \$700,000
• \$4,000 for loans over \$700,000
Online ExclusiveUp To \$4K Cashback

#### loans.com.au – Variable Basic Cashback Home Loan (Principal and Interest) (LVR < 70%)

• Immediate cashback upon settlement
• \$2,000 for loans up to \$700,000
• \$4,000 for loans over \$700,000
Variable
Apply In Minutes
• No application or ongoing fees. Annual rate discount
• Unlimited redraws & additional repayments. LVR <80%
• A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Apply In Minutes

#### Unloan – Variable Rate Home Loan LVR < 80%

• No application or ongoing fees. Annual rate discount
• Unlimited redraws & additional repayments. LVR <80%
• A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Variable
Unlimited Redraws
• No annual fees - None!
• Get fast pre-approval
• Unlimited additional repayments free of charge
• Redraw freely - Access your additional payments when you need them
• Home loan specialists available today
Unlimited Redraws

#### ubank – Neat Variable Home Loan (Principal and Interest) (LVR < 60%)

• No annual fees - None!
• Get fast pre-approval
• Unlimited additional repayments free of charge
• Redraw freely - Access your additional payments when you need them
• Home loan specialists available today
Variable
4.6 Star Customer Ratings
4.6 Star Customer Ratings

#### loans.com.au – Variable Home Loan (LVR < 90%)

Variable
Flexible Home Loan Options
• \$0 application fee & fast turnaround times
• Estimate your borrowing power in as little as 1 minute
Flexible Home Loan Options

#### Macquarie Bank – Offset Package Home Loan (Principal and Interest) (LVR 60%-70%)

• \$0 application fee & fast turnaround times
• Estimate your borrowing power in as little as 1 minute
Variable

#### ubank – Neat Variable Home Loan (Principal and Interest) (LVR ≤ 80%)

• Home loan specialists available today
Fixed

Fixed

Variable

#### Commonwealth Bank – Wealth Package Variable Home Loan (Principal and Interest) (LVR 70% - 80%)

Variable

#### NAB – Base Variable Home Loan (Principal and Interest) (New Customer)

Fixed

#### ANZ – Fixed Rate Home Loan (Principal and Interest) 5 Years (LVR < 80%)

Variable

#### loans.com.au – Solar Home Loan (Principal & Interest) (LVR < 90%)

Variable

#### Heritage Bank – Discount Variable Home Loan (\$150k+) (LVR < 70%)

Fixed

#### Newcastle Permanent – Premium Plus Package Fixed Rate Home Loan Special (Principal and Interest) 2 Years

Fixed

#### Commonwealth Bank – Fixed Rate Home Loan (Principal and Interest) 3 Years

Fixed

#### HSBC – Package Fixed Rate Home Loan (Principal and Interest) 4 Years (LVR < 80%)

Fixed

#### IMB Bank – Fixed Rate Home Loan (Principal and Interest) 3 Years (LVR ≤ 80%)

Fixed

#### ING – Fixed Rate Home Loan 5 Years (LVR < 80%)

Fixed

#### Newcastle Permanent – Fixed Rate Home Loan (Principal and Interest) 5 Years

Fixed

#### Newcastle Permanent – Premium Plus Package Fixed Rate Home Loan (Principal and Interest) 1 Year

Important Information and Comparison Rate Warning

Base criteria of: a \$400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a \$150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of May 28, 2024. View disclaimer.