What is negative gearing?

Negative gearing is one of those terms that gets floated about all the time but most of us aren’t really sure what it all means. Like ‘quantum physics’ or ‘why are mullet haircuts back in fashion?’. In a nutshell, negative gearing is when the cost of owning an investment property exceeds the income you get from it.  

Unlike those scientific and hairstyle mysteries, negative gearing is pretty straightforward once you look into it. So let’s look into it. We’ll worry about the mullets some other day. 

How is negative gearing different from positive gearing? 

If negative gearing is when the costs of an investment property are greater than the income generated, then positive gearing is the opposite: when the income from the property is greater than the costs and interest repayments, so you’re left with some extra cash leftover. 

What are the benefits of negative gearing? 

Now that you know the difference between positive and negative gearing, if you find yourself wondering why anyone would want to lose money on an investment property, you’re not alone. 

The three main potential benefits of negative gearing are: 

• Reducing your tax 
• Capital gain 
• More property options 

Let’s look at them in more detail. 

How can negative gearing reduce your tax? 

There are a number of ways investors can use negative gearing to reduce their tax liability. If you’re not making a profit on an investment, there’s nothing to tax. You can also deduct the losses from an investment property against other sources of income (like their wages or other investments), lowering your overall taxable income. This can be an attractive option for people who are in a high tax bracket looking for ways to reduce their tax bill. 

Of course, even if you’re not technically making a profit from it, the investment property should (hopefully) still be increasing in value, which brings us to the next point, capital gain. 

How can negative gearing give you a capital gain? 

Put simply, capital gain is when you sell an asset for more than you bought it for. As mentioned above, some investors don’t mind taking on a short-term loss for the potential long-term gain, relying on the property increasing in value to offset their loss while the property was negatively geared. That is, when they sell the property at a higher price down the track, that money will cover more than the temporary loss while it was negatively geared. 

Some investors simply wait for the property to increase in value, while others will take more proactive steps such as repairs or renovations to increase the value more quickly. 

It’s important to note that capital gains tax will apply to any profit made on the sale of an investment property, though there are ways you may be able to reduce or avoid this. 

How can negative gearing give you more properties to choose from? 

It can be hard to find properties that are immediately positively geared, and they are often more expensive too. If your cashflow allows you to manage negative gearing, you might be able to invest in a property in a more popular area that is more likely to attract tenants. 

What are the potential risks of negative gearing? 

Of course, negative gearing isn’t all sunshine, roses and mullet haircuts. It does come with risks that you should understand. The three main risks are: 

• Cash flow risks 
• Capital growth risks 
• Impacted borrowing power 

Let’s go through these risks. 

What are the cash flow risks associated with negative gearing? 

Negative gearing means you need to regularly be putting money towards your investment property out of your own pocket. Tax benefits may only come a year or more down the track, and capital gains might be some years away, depending on when you decide to sell. In the meantime, you need to have enough cash flow to cover the negative gearing. 

What are the capital growth risks associated with negative gearing? 

Capital growth can take years. In that time, your property’s value will be subject to price fluctuations. If your circumstances change and you have to sell it before it experiences capital growth – or for less than you bought it for, then you will make an overall loss on the investment. Choosing a property that will grow in value is complex and difficult. 

How can negative gearing impact my borrowing power? 

In the eyes of lenders, negative gearing impacts your overall income, which means if you wanted to borrow more money to buy another property (or for any other reason), you will likely not be able to borrow as much. 

Helpful tip:

High interest rates have been making it more and more expensive to take out mortgages and even the rent increases don’t always cover them. Whether you’re looking for a positive or a negatively geared investment property, it would be wise to make sure you have the cashflow to cover some extra. That way if the rates go up again, you’re covered. And if they go down, you have some extra wiggle room in your budget.

Debbie Shankar

Former Group Content Manager, Lendi

How can I negatively gear my property? 

First of all, you have to be declaring income from the property. That is, you can’t have an empty property that’s not bringing you any income and claim deductions against it 

Once your property is generating income, you can claim expenses against it to reduce that income. 

Expenses that you may be able to claim include: 

• The interest on your mortgage (but NOT the principal) 
• Property management fees 
• The cost of advertising for tenants 
• Maintenance and repairs 
• Strata fees, council levies and land tax
• Owner’s corporation levies 
• Insurance premiums 
• Depreciation on certain assets 

If you plan on claiming deductions against your investment property, you’ll need to keep clear documentation of both your income and your expenses for five years. The ATO has clear guidelines on the records you need to keep.  

Is negative gearing a good investment strategy? 

The question isn’t whether negative gearing is a good or bad investment strategy, it’s whether the strategy suits your unique circumstances. If your financial position is stable, you want to reduce your tax, and your cash flow can support it, negative gearing might suit you. If you already have high levels of debt, are in a low-no tax bracket (such as retirees), or do not have the cash flow to tide you over, negative gearing might not be a wise choice for you. 

Other factors that can impact how suitable negative gearing is for you can include the stability of the market, the current trend of property values, and interest rates.  

If you’re considering negative gearing, here are some questions to consider: 

• Is the property attractive to renters? 
• If I can’t find a tenant, how long can I cover the expenses?  
• How long do I want to hold onto the property, and is it likely to grow in value enough to cover my expenses in that time? 
• Can I still cover the expenses if interest rates rise? 
• Does the potential tax benefit outweigh the costs? 

As you can see a lot of factors involved in negative gearing means it isn’t just one size fits all. It can be a very personal thing. Like growing a mullet. 

Where can I find and compare Home Loans for my investment property? 

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