What Is Negative Gearing and How Does It Work?

Long story short, negative gearing means that you are making a loss. Basically, it shows that the interest expenses and repayments on your investment are greater than the rental return.

This can somehow be seen as good news, mainly because Australian property investors can significantly reduce their tax bill if they are subject to negative gearing. It also helps get your home loan approved as lenders take this deduction as borrowing power!

As expected with any useful benefit, negative gearing is now part of some controversies. Therefore, there are risks that come with it, as well as strategies that you can use to maximize the profit you gain from your property investment.

The Basics of Negative Gearing

As mentioned above, an investment property is considered negatively geared when the net rental income, after the deduction of expenses, is less than the interest that comes with the borrowed funds.

Naturally, the main result of negative gearing is a net rental loss. For example, you buy an investment property, renovate it, and then cover some of its maintenance costs. However, at the end of the year, you can be faced with a hard truth.

Namely – that the annual rental income that your investment generates is less than the expenses you have incurred and are related to that investment property.

The Good Side of Negative Gearing

We did mention that negative gearing comes with its own benefits, even if – overall – you are still losing money.

You can turn this loss into a benefit by offsetting negative gearing against the income that you earn from your other sources – other investments, income, and so on. In the end, you will be effectively earning less income. This means that you will have less tax to pay at the end of the next financial year.

In short, negatively geared investments give you the opportunity, and right, to deduct the difference resulted from your loss in your taxable income.

How Do You Calculate Negative Gearing Loss?

You need to do three things in order to come up with your negative gearing loss:

Add Up the Income from Your Property – this consists of the amount of rent that you collect from your investment property (multiply the weekly rent by 52).

Add Up the Expenses from Your Property – this includes maintenance costs, interest payments on the mortgage, as well as property management fees.

Deduct the Depreciation – depreciation is the loss that can be seen from the decrease in value of certain assets within your investment property as well as of the building itself. Almost anything can depreciate – drapes, carpets, appliances, and so on.

The Bottom Line

When looking for a deduction via negative gearing, you may even be able to deduct the full amount of rental expenses against your income (even your rental income), including wages and salary.

Overall, property investors can claim deductions in revenue, capital items, and building allowances – not to mention any additional deductible expenses, such as land tax, insurance, etc.

Basically, negative gearing can protect you in case of a loss. It can also be used as a strategy when your investment property is not doing well but be aware that strategies do come with risks.

We can offer you more information and answer your questions if you have any. Simply contact us! Our team of experts will answer your questions and help you with anything related to home loans – including the process of finding the best one for you.

Contact us on on 02 9121 6247 or submit your scenario online.