How Much Can You Claim on Negative Gearing in Australia?
At first glance, negative gearing sounds rather counter-intuitive. Why would investors intentionally make a loss on a property? Well, it all comes down to the taxman: any costs you incur on your rental property can later be claimed as a tax deduction.
Most investors understand that much, but there’s a lot more to negative gearing than meets the eye. What happens if you live abroad? What about the costs that aren’t deductible? And, ultimately, how much can you actually claim in tax benefits on a negatively geared property?
We’re here to unpack all of those topics and a lot more. If you want to learn how negative gearing works in practice, and whether it’s an appropriate investment strategy for you, you’re in the right place.
What is Negative Gearing?
Negative gearing is a property investment practice where the total expenses of a property outweigh the rental income. The net losses on the rental property are used to offset the investor’s assessable income, which works to lower the amount of tax they are required to pay in a given year.
Negative Gearing vs. Positive Gearing
The alternative to negative gearing, positive gearing, is where investment properties operate at a net profit. Rental income exceeds home loan repayments, council rates, strata fees and other ongoing costs, and the investor takes home a profit each month.
On the surface, this sounds more appealing than negative gearing. However, the profits yielded by a positively geared property form part of the investor’s annual assessable income, and are, therefore, liable to be taxed.
While negatively geared properties don’t yield profits from rental income, they can help investors reduce their overall tax bill. In certain scenarios, negative gearing can actually make investors wealthier than if they were to pursue a positive gearing strategy.
Is Negative Gearing Legal in Australia?
While some countries place restrictions on the use of negative gearing losses to offset taxable income, negative gearing is perfectly legal in Australia and has been used by investors for decades.
Under Australian tax law, property investors can claim the interest portion of their loan repayments and many other expenses as tax deductions, provided the property is rented or available for rent.
You won’t find the phrase ‘negative gearing’ in the legislation, but the practice is currently tolerated by policymakers. That’s not to say things won’t change in the future: politicians have questioned negative gearing and proposed abolishing the controversial practice in the past.
What Can You Claim on Negative Gearing in Australia?
Provided your negatively geared property is rented, or genuinely available to rent, you can claim deductions on most property expenses in the income year you incur them. These include interest expenses, council rates, strata fees, maintenance costs, agent fees; essentially any expense with an income-producing use.
Here’s a list of property expenses you can claim in the income year they’re incurred:
- Interest on home loan repayments
- Council rates
- Strata fees
- Maintenance costs
- Estate agent fees
- Advertising costs
- Land tax
- Water charges
- Pest control
There is another set of expenses you can claim over several years. This includes:
- Capital works: renovations, extensions, and any other property improvements that go beyond simple wear and tear
- Borrowing expenses: Lender’s Mortgage Insurance (LMI), loan establishment fees, mortgage broker fees, solicitors’ fees, and stamp duty charged on the mortgage
- Depreciating assets: depreciation of value in assets that aren’t a permanent part of the property premises, such as carpets, curtains, furniture and appliances
Make sure to keep detailed records of all expenses you incur on your investment property for tax purposes. If you co-own the rental property, or if it is not available to rent for part of the year, the amount you will be able to claim for a tax deduction will be diminished.
For more information on what expenses can be claimed on your negatively geared property, visit the Australian Tax Office website.
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What Can’t You Claim on Negative Gearing in Australia?
Most investment property expenses in Australia can be claimed for tax deductions, but there are some exceptions. Certain borrowing costs, such as stamp duty, loan balances and the amount you borrow for the property, as well as the decline in value of second-hand assets within the property, are not deductible.
Below is a list of the borrowing costs that can’t be claimed as deductible expenses:
- The amount you borrow for the property
- Loan balances for the property
- Principal payments on the loan
- Legal expenses for the purchase of the property
- Insurance premiums
- Borrowing expenses on any portion of the loan you use for private purposes
In addition to the items above, nor can you deduct any expenses related to the depreciation of assets (such as carpets, curtains, furniture and appliances) that were installed before you became the owner of the rental property. Some exceptions to this rule apply.
For more information on what expenses can’t be claimed on your negatively geared property, visit the Australian Tax Office website.
How Much Can You Claim on Negative Gearing in Australia?
You can deduct the total net loss on your negatively geared property from your assessable income, provided the expenses are deductible. For example, if you made a loss of $1,000 on a property in a given year, you’d be entitled to deduct $1,000 from your assessable income.
Deductible losses from your investment property and then subtracted from your assessable income to find your taxable income; this is the figure you pay tax on.
Claiming expenses on your negatively geared property, therefore, reduces the amount of tax you are required to pay and, in some cases, may even lower your tax bracket.
How to Calculate Your Tax Refund from Your Investment Property
If you’ve kept detailed records of your investment expenses over the years, working out your tax refund from negative gearing is fairly simple. Follow the five-step process step below:
- Add up your annual property income. If you receive rent from tenants weekly, and the property has been occupied for the full year, multiply weekly rent by 52
- Add up your annual property expenses. Add together all property expenses that can be claimed as tax (see the lists above) for the year
- Calculate your losses on depreciating assets. Add up any losses associated with the decline in value of property assets like furniture, curtains, carpets and appliances
- Add together property expenses and losses on depreciating assets. This is your total taxable expenses for the year
- Subtract your annual property income from your total annual expenses. If the result is positive, your property is negatively geared and you can deduct the remaining figure from your assessable income when completing your tax return
Let’s put the process into practice with an example…
Lucas is an Australian expat living in Hong Kong. Last year, he purchased an investment property in Brisbane and immediately rented it out. A full year has now passed and Lucas has made a net rental loss on the property.
His annual rental income is $20,000, but through loan repayments, council rates, strata fees, marketing, maintenance and a heap of other costs, he ended up spending $27,000 on the property in the first year. Lucas also works out that depreciating assets have cost him $500.
That means his total taxable expenses for the year are $27,500. That’s $7,500 more than the income on his investment property, and he can deduct these losses from his assessable income when submitting his tax bill to the ATO back in Australia.
Lucas pays tax in Australia at the rate of 32.5%. This means he receives a tax refund of $2,437.50 from his negatively geared property. So, in the end, Lucas only makes a real loss of $5,062.50 on his investment property in the first year.
Is Negative Gearing the Right Investment Strategy For You?
Generally, negative gearing is favoured by investors with a high assessable income. It also tends to be used when the negatively geared property is appreciating in value. Whether it’s the right strategy for you depends on your tax bracket, your property’s expenses, the amount of interest you pay towards the loan and several other factors.
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Key Considerations for Negative Gearing
The most important consideration when selecting your gearing strategy is your yearly salary. Are you sitting near the borderline between two tax brackets? If so, tax deductions from negative gearing could push you into a lower bracket and potentially save you thousands of dollars.
A good starting point is to calculate your total taxable income after factoring in any gains or losses from your prospective investment property. How does this compare to your taxable income without the investment property?
Secondly, compare the effects of a positively geared property and a negatively geared property on your taxable income. If the tax benefits generated by the negatively geared property are similar or only marginally less than the income from the positively geared property, you might want to pursue negative gearing further.
If you favour a negatively geared property, find a rental property that’s likely to rise in value. It’s far easier to find a negatively geared property with strong capital growth potential than a positively geared property in the same vein. Appreciation can offset your property expenses by the time you come to sell.
When to Pursue Positive Gearing
For many investors, positive gearing represents a more secure and reliable strategy, and it’s generally more suitable for those in a lower tax bracket. A positive net rental yield will increase your borrowing power and allow you to pay down your investment loan at a faster rate.
In turn, this builds your home equity and frees up cash to be used elsewhere, such as on another investment property. The catch here is, of course, more tax. Nevertheless, positive gearing is the starting point for most new property investors.
I’m an Expat, is Negative Gearing Right for Me?
Unless you have a big portfolio of investment properties in Australia, generating a large sum of taxable income every year, positive gearing is likely to be more suitable than negative gearing. With no Australian salary, your tax obligations to the ATO will be more lenient, which makes the argument for negative gearing less compelling.
That said, if there’s potential to lower your Australian tax bracket as an expat, there’s every reason to pursue a negative gearing strategy.
With so much dense tax legislation to wade through, you’d be forgiven for not completely grasping negative gearing. The short story is that you can claim pretty much all expenses you incur on a negatively geared property as tax refunds when you come to fill in your tax return.
If you’re no closer to working out if negative gearing is right for you, don’t hesitate to contact us. Our team of experts will help you assess your options and take the next step in your property investment journey.