Negative gearing: What it is and how it’s calculated

Negative gearing is a term you’ll often hear when talking about property investment, but what does it actually mean?

Put simply, negative gearing is when the costs of owning an investment asset are greater than the income you earn from holding or operating it.

When you have a negatively geared asset such as an investment property, you can claim your losses as a deduction on your tax return, which reduces your taxable income and in turn can reduce your annual tax bill.

Editor’s note: Check the ATO website or seek advice from a financial professional to help understand your unique situation.

Negative gearing is when the costs of owning an investment outweigh the income earned from it.

In Australia, negative gearing is commonly associated with property investment – for example, your investment property is negatively geared if the costs of your home loan repayments are more than the income you receive from renting it out.

If your investment is negatively geared, you can claim it as a tax deduction against your overall income, which means you’ll pay less tax.

Negative gearing applies to any form of investment, but let’s look at negative gearing in the context of property.

To keep it simple, let’s say the home loan repayments on your investment property are $2,500 a month – that’s $30,000 a year.

On top of that, there are costs associated with renting out the property. 

Some of these costs can include a real estate agent to manage your property, home insurance, council rates, strata fees and maintenance and repairs, just to name some examples.

Factoring in these costs along with your home loan repayments, let’s say you’re now spending $35,000 on your investment property each year.

Continuing with this example – you rent out your investment property and earn $27,000 a year from your tenant.

These calculations show a shortfall of $8,000 each year, which means you’re operating at a loss.

You can also claim some of your expenses for your investment property, but we’ll get into that shortly.

The property is negatively geared in this scenario, so you can deduct the loss of $8,000 from your overall income when it comes time to file your taxes.

So let’s factor that in – say you have a salary of $100,000 a year, you can deduct $8,000 from your net income, so you’ll only pay tax on $92,000.

There’s not a significant difference in the tax you’ll pay on an income of $100,000 versus $92,000.

Using Mozo’s income tax calculator, we’ve got the following estimates for the 2024/25 financial year.

There’s only a difference of $2,560 for the taxable income, which only partly makes up for the original shortfall of $8,000.

So, why is a loss sometimes seen as an attractive strategy to investors? For the full picture, you also have to consider the potential for capital gain and the accompanying capital gains tax.

It does sound strange that incurring a loss from renting out your investment property can be seen as beneficial, but in some cases, the potential for capital gain (profit) earned from selling the property later on exceeds the initial loss.

The capital gain can also be made greater if you’re eligible for the 50% discount.

In other words, assuming you’re eligible for the capital gains tax discount and you make a profit on selling your investment property, only 50% of the profit you make is subject to the income tax.

So, is negative gearing good or bad? The answer is complex and different for everyone.

Firstly, there are real risks associated with negative gearing such as:

• Selling the property for less than what you paid for it (capital loss).
• Selling the property for less than what you owe from your home loan and investment expenses.
• Not having enough income to absorb losses or high expenses, especially if interest rate rises impact your investment home loans rate.

There are also benefits and drawbacks to negative gearing and how it impacts Australia’s property market more broadly.

Mozo’s financial services expert, Peter Marshall, says negative gearing might be beneficial to investors but not for first-time buyers.

“Negative gearing makes it more attractive for investors to consider putting their money into housing property, which can help encourage the building of more homes,” he says.

“However, that also means there is more competition in the property market, which can make houses more expensive and harder for people at the lower end of the market to get out of renting and buy their first home.”

You can claim expenses for your investment property as a tax deduction. Here are some examples of rental expenses to claim according to the ATO:

• Interest on your home loan: You can claim a deduction for interest payments on the home loan if it is rented or genuinely available for rent for part of the year.
• Repairs and maintenance: You can claim maintenance costs, such as fixing damage or wear and tear to the investment property.
• Council rates and body corporate fees: Ongoing fees such as council rates, water charges and land tax, as well as body corporate fees (strata fees) can count towards investment deductions.
• Depreciating assets: Depreciating assets are those that are not part of your rental property premises, such as carpets, curtains, appliances and furniture.
• Capital works: Expenses for building the investment property, along with structural improvements, alterations and extensions. Check the ATO’s website for more details.