Do you Want or Need to
Negatively Gear your Property?
Discover how we can help you efficiently set up
and maximise your negative gearing.
What is negative gearing?
As defined by the Australian Taxation Office (ATO), a rental property is negatively geared if:
- it is purchased with the assistance of borrowed funds, and
- the net rental income, after the deduction of expenses on the property, is less than the interest on the borrowings.
In which case, you will have a net rental loss.
Negative gearing deductions
Now, you may be able to claim this loss as a deduction against other incomes such as:
- your salary,
- your wages, and/or
- your business income,
through your tax return for the relevant income year.
As you can see, there can be tax benefits to having a negatively geared property.
Tax benefit of a negatively geared property example
Let us consider an easy example of how negative tax gearing can be an attractive tax-reducing scheme.
Let’s say you have a salary of $80,000, pays PAYG instalments of $17,550 and you have a net rental loss of $25,000 on a property.
For the purposes of this example we shall ignore everything else eg. Medicare Levy and tax offsets.
The loss of $25,000 will be deducted from your salary of $80,000, which will bring down your taxable income to $55,000.
You will then be taxed on $55,000 rather than on the $80,000.
And if, for example, your tax on the $55,000 is $11,310, then the difference from what has been paid via PAYG will result in a tax refund of $6,240 for you. A nice little bonus!
Negative gearing considerations
The example above is general in nature and doesn’t take into account other considerations such as:
- your personal financial situation,
and thetype of investment property you have negatively geared.
Negative gearing disadvantages
There are several disadvantages in this type of investment strategy that you may need to know.
One of the main disadvantages is with regards to personal cash flow or availability of on-hand money.
To explain, on top of your personal regular expenses (food, rent, petrol, …), you will also have expenses related to your investment property: rates and maintenance for example.
This means that, at times, you will have less of your wages available on hand.
It also means that you will need to anticipate such expenses and financially prepare for them.
Negatively geared for tax breaks
Investing in a negatively geared property requires proper planning.
For example, you should not negatively gear a property simply for the tax benefits it will offer you.
Instead, you will want to invest in a negatively geared property because of the anticipation and expectation of a capital value increase in the property.
Capital gain tax
And when the timewill come for you to ysell your property, the ATO will expect you to Capital Gain Tax on that property.
See our report on Capital Gains to understand how tax is calculated.
Get professional and valuable financial advice
If you are looking at purchasing an investment property (ie. one that will be negatively geared), feel free to contact us as we will be able to help you with:
- giving you professional and valuable advice based on your personal situation,
- helping you get into the right investment property,
and helpingyou set up the most tax effective way of handling this type of investment.
And if you have an existing property that is already negatively geared, then we can help you make it financially work for you.
We can also help you with any of the following:
- negative gearing facts, faq and tips, pros and cons, tax benefits and return,
- negative gearing for
buyer, a new home, firsthome a vacantland or a new property, your own home, a granny flat,
- negative gearing for non-residents of Australia, foreign or overseas property,
- negative gearing your holiday home or house, the house you live in or your primary main residence, joint ownership and/or joint tenants, rental property, during construction
- negative gearing rules, strategy, vs investment, vs salary sacrifice, what can you claim, using equity, while renting, vs. shares, property depreciation, renting to family, and mortgage, expenses, multiple properties, home loan,
- and more…