Negative Gearing in Australia: Definition, Advantages and Disadvantages

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Property investors utilise various strategies to make the most of their investment. Negative gearing in Australia is a controversial but highly practised way for Aussies to afford property expenses and property investment.

Although not suitable for everyone, there are certain benefits and detrimental risks from negative gearing. As an Australian expat, you should understand what negative gearing is, how negative gearing works and the advantages and disadvantages before investing in your property from overseas.

What is Negative Gearing?

To understand what negative gearing is, you should first know that gearing is the act of borrowing money. A negatively geared property is when the cost of interest repayments, maintenance costs, and land tax bill is greater than the investment return. Property investors take advantage of losing money by deducting it from their capital gains tax.

For example, if you buy a property for $600,000 with a 30% deposit of $180,000, your mortgage is $420,000. You pay interest of 4% over thirty years, your loan repayments are $462.42 per week – or $5,549.04 per year. Your rental income equals $450 a week and $5,400 annually. In addition, you pay $1,000 in maintenance costs in the first year of owning your rental property.

Therefore, you have made a net rental loss of $1,149.04 in your first year as a property investor. However, by negative gearing, you can claim tax deductions for your investment expenses in the same financial year. In some circumstances, this can improve your capital gain more substantially than a positively geared property.

Although negative gearing is most commonly associated with investment properties, it can also be made use of in other financial situations. For example, Australian tax law also lets you negatively gear shares and bonds.

Unfortunately, however, as an Aussie expat, you can only claim against the tax you pay in Australia, not your foreign income. Therefore, unless you have a taxable income in Australia, negative gearing might not be worthwhile.

Negative Gearing in Australia Definition, Advantages and Disadvantages

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How Does Negative Gearing Work in Australia?

In Australia, negative gearing involves using an investment property to make a tax-deductible loss that you can offset against your other income, potentially reducing your taxable income and tax bill. Here’s a breakdown of how it works.

Expenses Exceed Income

You purchase an investment property (apartment, house, etc.) with a loan, incurring borrowing costs (interest). You also incur other expenses like property management fees, council rates, repairs, and depreciation. If the total property expenses (including interest and other costs) are higher than the rental income you receive from tenants, you have a net rental loss.

Claiming the Loss

This net rental loss is considered a deductible expense in your Australian tax return. You can offset this loss against your other income sources, such as your salary or wages. This reduces your taxable income, potentially resulting in a lower tax bill.

Considerations and Caveats

Remember, the goal isn’t simply generating losses but building long-term wealth through property appreciation. Negative gearing only applies to Australian income and properties; overseas properties have different tax rules. It’s a complex strategy with risks like rising interest rates, falling property values, and vacancies. Seek professional financial advice to assess your individual circumstances and plan a well-informed investment strategy.

Here’s an example to illustrate:

  • Imagine your gross rental income is $20,000 per year.
  • Your total property expenses (including interest) are $25,000 per year.
  • This creates a net rental loss of $5,000.
  • If your salary is $70,000, your taxable income reduces to $65,000 ($70,000 – $5,000).

This could potentially lower your tax bill depending on your tax bracket.

Remember, negative gearing is just one tool in a larger investment toolbox. It’s essential to analyse your financial situation, risks involved, and long-term goals before making any investment decisions. Good luck and best of luck with your investment journey!

Why Is Negative Gearing Australia's Most Popular Investment Strategy?

According to the Treasury, in 2012-13, around 1,300,000 million people engaged in negative gearing investment property out of the over 1,900,000 million Australians earning rental income. That’s around 68% of Australian investors using negative gearing to receive tax benefits.

It is commonly assumed that negative gearing investment property is taken advantage of by those with higher incomes making it more difficult for first-time buyers to invest in property. However, this is not necessarily the case. 

Negative gearing investment property can actually benefit the population as it lowers rental prices and increases the construction of housing. Throughout Australia’s history, negative gearing has come under fire again and again. Yet, each time restrictions are imposed, they are often reversed again soon after. One such occasion was the Henry Tax review in 2010.

The Henry Tax Review

The Henry Tax Review was designed to guide tax reforms over the next few decades. The report indicated that wealthy property investors were disproportionately profiting from tax concessions paid by ordinary taxpayers.

The review suggested that a savings income discount replace the capital gains tax discount. This new policy covers interest from the bank, rental income, capital gains and expenses from share investments. This would limit real estate investment to claim only 60% as tax-deductible.

However, this new policy was dismissed in favour of negative gearing as, without it, rental supply and affordability of property prices would diminish.

How Do I Calculate Negative Gearing?

It’s quite easy to calculate negative gearing. Simply follow these few steps:

  • Firstly, calculate your property income. This includes annual rental income in Australia as well as any other income you receive from the property, such as phone masts.
  • Calculate your property expenses. This consists of the interest payable on property investments, as well as other rental expenses, such as property management fees, maintenance, insurance and strata fees. Calculate your loan payments to find out your expenses.
  • Deduct any depreciation costs.

You can claim depreciation on the property itself and on certain goods within the rental property, such as appliances, carpets and curtains. You can deduct construction costs at 2.5% per year on a new build. Your accountant or financial adviser should assist you in creating a depreciation schedule to claim on your return.

If you’re keen to start negatively gearing your property investment, calculate your investment returns to see whether it is a good investment strategy for you as an Aussie expat. 

However, remember that you can only deduct from your Australian income tax. You cannot use negative gearing on an overseas property or deduct tax from your foreign tax office. For example, you cannot claim tax deductions on your income from the US or UK. This only works for income, tax and properties within Australia.

Additional Deductible Expenses

There are additional expenses to deduct from your taxable income on your negatively geared property. Talk to a tax specialist about what you are allowed to deduct from your net income tax.

Additional deductible expenses include the following.

  • Revenue Deductions: You can deduct the interest payments on your investment loan from your other taxable income. You can also deduct ongoing maintenance expenses and property management.
  • Capital Goods: Large items, such as a dishwasher or washing machine, in a rental property depreciate over several years. These goods can be claimed over the years.
  • Building Costs: You can claim for the depreciation of the building, as well as building works and maintenance fees. If your rental property is in a strata complex, you can deduct strata fees and other building costs.
  • Body corporate fees.
  • Advertising for tenants costs.
  • Insurance expenses.
  • Property agent and management fees.
  • Land tax, stamp duty and charges on your loan.
  • Repairs, maintenance and cleaning costs and services, as well as gardening and lawn mowing costs.
  • Bank fees.
  • Council and water rates.
  • Capital works costs.

As you’re living overseas, you will likely have a property manager maintaining the house and looking after the tenant. You can claim this against your Australian tax.

Negative Gearing in Australia Definition, Advantages and Disadvantages

Pros of Negative Gearing

We’ve already covered how negative gearing on property investing can result in tax benefits. Done properly, negative gearing can benefit both renter and landlord alike. Firstly, because negatively geared property investments do not seek to earn a positive capital gain, rental fees are often comparatively low.

Low rental fees benefit the immediate renter and also lowers other property investors rent prices through competition. This helps create long-term mutually beneficial relationships between tenants and landlords, reducing agency fees. It also reduces the loss of income as the property will not be vacant for long periods of time.

Secondly, as we’ve already mentioned, the loss made on the investment property can be offset against your taxable income. Therefore, you pay less tax while gaining from long term increased property value.

The increased property value is a major benefit for negative gearing property investment. Negatively geared properties tend to be those that do well on the property market. The key is to invest in an up-and-coming area to see your property investment appreciate in value over the years.

The benefits of negative gearing are not short term. Profits are usually accumulated over a longer period of time. Therefore, it is sensible to evaluate the risks and ensure you are able to cover the costs of your investment loan repayments while making a short-term loss on your investment property. 

If you are planning to move back to Australia to sell in the distant future, it might be a good investment strategy.

Cons of Negative Gearing

The disadvantages of negative gearing lie mostly in the risks that accompany the financial venture of investing in property. Firstly, the biggest risk is to your capital. If something were to go wrong – say you couldn’t find tenants for a period of time, or you lose your main source of income, e.g. job – you risk not being able to cover your loan and interest repayments.

There is also the risk that the property market falls in the area you invest in. You can prevent this by doing your research into the neighbourhood property prices.

Secondly, as you are making use of a negative cash flow, you need to ensure that you can make up the difference in loan repayments throughout the year. Negative gearing risks your property being repossessed should you default on a payment. To limit this, find an investment loan with good interest rates and only borrow money that you know you can repay.

You should speak to a financial advisor, tax accountant and mortgage broker to make sure your property investment is a good financial investment.

Thirdly, as mentioned above, negative gearing is a long-term investment. While this is good for some people, it locks up capital for long periods of time. Don’t invest money that you will need in the near future—ensure that whatever funds you sink into your investment property can be tied up for up to a decade.

Before deciding that negative gearing is a good idea for your investment property, consider the following questions:

  • What if you have cash flow problems?
  • What if you can’t find a tenant? How will you cover the expenses of a vacant property?
  • What if the property market drops and you are unable to meet the profits you need?
  • What if you are unable to repay your loans for your investment property?

As with any big investment, you should carefully consider the risks and disadvantages and how you might overcome them. Negative gearing can be a particularly precarious position for anyone who does not research their investment.

Positive Gearing vs Negative Gearing

While negative gearing is the act of intentionally not making a profit on property investment, positively geared properties make enough money to pay back all expenses. On the face of it, positive gearing is the sensible option: make a profit from day one and never worry about meeting your loan and interest repayments.

However, negative vs positive gearing both have their place in investment strategies. A positively geared won’t increase in value as much. Therefore, it is less of a long-term investment. So, if you are looking for capital growth over income, negative gearing is the way forward.

Remember, however, that you will have to pay tax on the rental income from your positively geared property. But, negative gearing reduces your taxable income. Therefore, negative gearing usually produces better capital growth.

Yet, a well-balanced investment portfolio should contain both. To begin negative gearing, you should pay attention to property values and keep well-written records and receipts of all expenses related to your investment. Seek out tax advice to decide if negative gearing makes sense for your financial situation.

Negative Gearing in Australia Definition, Advantages and Disadvantages

How Much Can I Save on Taxes with Negative Gearing?

The amount of money you can save on your tax return depends entirely on the size of the property and your maintenance and interest expenses. Simply speaking, the amount you can claim against your income tax is the difference between the rental income and the expenses.

If we return to our earlier example, each year you make a loss of $1,149.04 after receiving your rental income of $5,400 but paying $5,549.04 in expenses. Therefore, you can claim $1,149.04 as a tax refund against your taxable income within the same financial year if your property is negatively geared.

The higher your income, the more you can save on your tax return. However, if your salary sits below the minimum income tax rates, positive gearing might suit you better as you cannot reduce your overall tax bill.

Is Negatively Geared Investment Property Right for You?

As we’ve said, negative gearing is not for everyone. If you’re in a low tax bracket or your main income is in a foreign currency, for example, you limit the amount of money you can claim back from the Australian taxation office. Positive gearing increases your earnings, giving you more borrowing power, that you can then use to pay back your loan more quickly.

However, negative gearing isn’t just for the rich.

Even if you’re not on a high salary, negatively gearing a property allows you to own an asset that will increase in value over time while paying no tax on it. Even if your main source of income is not in Australia, this doesn’t mean you cannot take advantage of negative gearing as an expat.

There are advantages and disadvantages to both strategies for Australian expats. As long as you consult professional help when you need to and conduct thorough research into the property’s prospects, negative gearing could be a beneficial investment strategy.

Speak with the Experts!

At Odin Mortgage, we’re keen to help expats and non-residents to make the best mortgage decisions for them. We understand the difficulty of purchasing a property from overseas and provide a wide range of resources to assist your home loan process.

If you’re interested in negatively gearing your property, speak with the experts to discover how to get your home loan today.

Get a free Australian mortgage assessment today.

Apply online to get a free recommendation with real rates and repayments.

Frequently Asked Questions

Negative gearing has a long history in Australia. Unlike in most countries, negatively gearing a property is unrestricted here. This means that the amount of money you claim on your tax return is technically unlimited.

Negative gearing is also allowed for Aussie expats, however, those living abroad miss out on the 50% capital gain tax concession on investment properties.

Negative gearing is the act of making a loss on your rental property in order to deduct expenses and interest payable from your tax return. Negatively geared properties tend to go up in price, meaning that when you sell, you should have made your money back.

Negative gearing lowers rental prices and is a viable investment strategy for all Australians.

Traditionally, Australians have always been allowed to negatively gear their properties. Offsetting losses against your taxable income has more of a chequered past.

Despite the brief restrictions on negative gearing in Victoria in the 1980s and again in 2010, however, the Australian tax office has always encouraged negative gearing.

Negative gearing is a long-term investment. As you make initial losses on your investment property, it might not be a good investment if you need fast access to capital. However, if you can afford to cover your monthly expenses despite making a loss on your rental income, negative gearing can see significant long term tax savings and increased property value.

The potential “amount” of negative gearing on an overseas property depends on several factors, and it’s important to clarify that claiming negative gearing on overseas property for Australian tax purposes is generally not possible.

Here’s why:

  • Negative Gearing Only Applies to Australian Income and Properties: The Australian tax system allows you to claim tax deductions for expenses related to owning an investment property (interest, maintenance, etc.) if those expenses exceed the rental income. However, this only applies to properties located within Australia.
  • Overseas Property Income and Expenses are Taxed Differently: You may owe taxes on the rental income generated from an overseas property in the country where the property is located. However, expenses related to that property generally cannot be used to offset your Australian taxable income.

However, there are some nuances to consider:

  • Foreign Resident Status: If you become a foreign resident for tax purposes (meaning you spend less than 183 days in Australia per year), the Australian tax system will not apply to your income from overseas properties. However, this also means you cannot claim any deductions related to that property against your Australian income.
  • Depreciation: Some countries allow depreciation claims on investment properties, which can reduce your taxable income on the rental income. This depreciation may be different than what’s allowed in Australia, so it’s important to understand the specific tax rules of the country where the property is located.

Overall, it’s crucial to remember that negative gearing does not directly apply to overseas properties for Australian tax purposes. If you’re considering purchasing an overseas property, it’s essential to seek professional advice from a tax advisor familiar with both Australian and the local tax laws of the country where the property is located. They can help you understand the potential tax implications and determine whether your investment goals can be achieved within the specific legal framework.

Yes, negative gearing is still available in Australia as of 2024. Despite some past proposals from certain political parties to restrict it, the current Australian tax system allows investors to claim tax deductions for expenses related to investment properties if those expenses exceed the rental income. This means property investors can offset losses on investment properties against their other taxable income, potentially reducing their overall tax bill.

If you’re considering using negative gearing as part of your investment strategy, it’s highly recommended to seek professional financial advice from a qualified advisor who can assess your individual circumstances and recommend the best approach for your financial goals.

Let’s consider an example of negative gearing in action with the help of Sarah, a high-income earner.

  • Salary: $150,000 per year
  • Tax bracket: 39%
  • Investment Property Purchased
    • Price: $500,000
    • Down Payment: $100,000
    • Loan Amount: $400,000
    • Interest Rate: 5%
  • Annual Rental Income: $25,000
  • Property Expenses
    • Interest: $20,000 ($400,000 loan * 5% interest)
    • Repairs and Maintenance: $2,000
    • Council Rates and Insurance: $3,000
    • Total Property Expenses: $25,000

Below is the analysis.

  • Sarah’s rental income exactly matches her property expenses, meaning she has no net rental income or loss.
  • However, because of the interest on her loan, she can claim $20,000 in tax-deductible expenses.
  • This $20,000 deduction reduces her taxable income from $150,000 to $130,000.
  • Based on her 39% tax bracket, Sarah saves $7,800 in taxes ($20,000 deduction * 39% tax rate).

Important aspects to remember:

  • Sarah doesn’t make any actual cash flow from this investment, as her rental income exactly covers her expenses.
  • Her primary benefit is the tax reduction due to the deductible interest.
  • This example assumes stable rental income and no unexpected expenses. Rising interest rates, vacancies, or high repair costs could quickly turn this into a negative cash flow situation.
  • Negative gearing should be considered as a long-term strategy for potential capital appreciation through property value growth.

Hope this example provides a clearer picture of how negative gearing works in practice.

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