Negative Gearing Guide
Negative gearing is a popular strategy among Australian property investors. It allows you to offset property-related expenses that exceed rental income, reducing your taxable income. While not suitable for everyone, negative gearing can be a powerful tool for long-term wealth building when used strategically.
As experienced mortgage brokers serving Bondi Junction and Launceston, we’ve created this guide to help you understand how negative gearing works and how to decide if it’s right for you.
What is Negative Gearing?
Negative gearing occurs when the costs of owning an investment property (such as mortgage interest, maintenance, and depreciation) exceed the rental income it generates.
Example:
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- Rental Income: $25,000/year
- Property Expenses: $30,000/year
- Net Loss: $5,000/year
This $5,000 loss can be deducted from your taxable income, reducing the amount of tax you owe.
Benefits of Negative Gearing
Negative gearing offers several advantages for property investors:
Tax Savings
Reducing your taxable income can lead to significant savings at tax time.
Long-Term Capital Growth
Investors often use negative gearing for properties in high-growth areas, banking on future value increases to offset current losses.
Cash Flow Management
Helps high-income earners manage their tax liabilities while building their property portfolio.
Is Negative Gearing Right for You?
Negative gearing is most beneficial for:
High-Income Earners
Those in higher tax brackets gain the most from deductions.
Long-Term Investors
Those focused on capital growth rather than immediate cash flow.
Investors in High-Demand Areas
Suburbs like Bondi Junction, where property values appreciate over time, are ideal for this strategy.
However, investors relying on rental income for immediate cash flow may find positive gearing more suitable.
What Can You Claim with Negative Gearing?
Common expenses that can be deducted include:
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- Loan interest payments.
- Maintenance and repairs.
- Property management fees.
- Depreciation of the building and fixtures.
- Council rates and insurance premiums.
Risks of Negative Gearing
While negative gearing has its benefits, it’s not without risks:
Cash Flow Strain
Covering ongoing losses requires strong financial stability.
Market Dependence
The strategy hinges on capital growth, which isn’t guaranteed in all markets.
Tax Policy Changes
Future changes in tax laws could impact the benefits of negative gearing.
FAQs About Rental Yields
What is the difference between negative and positive gearing?
Negative gearing occurs when expenses exceed income, creating a tax-deductible loss. Positive gearing means rental income exceeds expenses, generating immediate profit.
Can I claim negative gearing on my main residence?
No, negative gearing is only applicable to investment properties, not primary residences.
Is negative gearing suitable for low-income earners?
Generally, negative gearing is less beneficial for low-income earners since the tax savings are proportional to your income tax bracket.
Can I use negative gearing on multiple properties?
Yes, you can apply negative gearing across multiple investment properties if they generate losses.
How does depreciation impact negative gearing?
Depreciation can increase your deductible expenses, making negative gearing even more tax-effective. Learn more in our Guide to Property Depreciation.
How We Can Help with Negative Gearing
Negative gearing can be a powerful investment strategy when paired with the right financial planning. Our team of expert mortgage brokers can guide you in structuring your loans and selecting properties that align with your goals.