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How Do You Benefit From Negative Gearing?

It is crucial to understand what negative gearing is and the possible benefits and hazards that come along with it if you are an investor in real estate or are intending to become one in the near future.

When it comes to being able to make informed investment decisions, it is crucial for property investors in Australia to have a firm grip on the notion of gearing.

To put it another way, gearing refers to borrowing a certain amount of money in order to purchase an asset, in this case, a piece of real estate.

There are three different modes of gearing: Positive gearing occurs when the income generated by the property is greater than the sum of the interest paid on the loan and other expenses. Negative gearing occurs when the value of the interest paid on the loan and other expenses is higher than the value of the income generated by the property (i.e. rent and the like).

Purchasing an investment property that results in a loss rather than an income is what is meant by the term "negative gearing." That is, the total sum of expenses from maintenance and repairs, loan principal and interest repayments, and the rental revenue the property generates are all greater than the money generated from renting the property. Some real estate investors favour investing in negatively geared properties, in spite of the possibility of incurring a significant ongoing loss and the necessity of footing a portion of the financial burden themselves.

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Investors in real estate in Australia can minimize their losses through the utilization of tax incentives known as negative gearing as they wait for potential long-term capital gains. Investors can reduce their taxable income by the amount of the net loss they incur on a rental property if they follow the approach. How does this all add up, and is using negative gearing an effective technique for minimizing taxes?

Our on-again, off-again passion for negative gearing property is almost as common as our fixation with the rising costs of real estate here in Australia. Many of us still have trouble comprehending what negative gearing is and why it could be advantageous to make a loss on the property we own unless we are already involved in the real estate investment industry.

What is Negative Gearing?

The best way to learn negative gearing is to start from the very beginning. The term "gearing" refers to the practice of borrowing money in order to make an investment, and investors will typically either positively, negatively, or neutrally gear properties. Having a property that is positively geared means that the amount of rent that it brings in is greater than the amount of interest and other expenses that it owes. In other words, you come out ahead financially.

When you have neutral gearing, your interest payments and other outgoings are equal to the amount of rent you get.

When you have negative gearing, your rental income does not cover the cost of your loan repayments and other outgoings, and you need to make up the difference from your salary or some other source of income in order to meet your financial obligations regarding the upkeep of your property and the repayment of your loans. This would be deemed a financial loss.

The practice of investing in real estate is notoriously complicated on a procedural level, with negative gearing serving as one of the most contentious issues within the sector. Because of their own long-term investment strategy, investors often choose to stay on negatively geared property for a period of time. It is crucial to understand the benefits of doing so.

The Benefits of Negative Gearing

The use of negative gearing can provide a variety of benefits. One of the other four or five things I want to discuss with you is targeting high growth locations.

There are numerous significant benefits associated with employing a negatively geared plan to invest in real estate, which is one of the most frequent investment strategies used in Australia. In today's segment, I'll discuss five different positive aspects of using negative gearing.

In reality, it is a lot more challenging to track down positively geared real estate in Australia in comparison to other countries.

In a nutshell, you don't have to pay tax on a loss, and if you qualify for negative gearing, you might even be able to deduct the loss from your income, which would result in a lower amount of income that is subject to taxation. Negative gearing can be a boon for taxpayers who are subject to a tax rate that is quite high. You can also claim depreciation on the value of improvements made to the property while it is being rented, such as a new kitchen or renovations. This is something that is allowed by the tax code.

The most important advantage of using negative gearing is that it enables you to deduct losses from other sources of income, such as your wage, even if those losses were caused by your rental property. This lowers the amount of your taxable income as well as the amount of tax that you are required to pay.

Concentrate on High Growth Regions

You have the ability to focus on high-growth sectors, which is the primary benefit of negative gearing and arguably the primary reason why the majority of people opt to pursue this course of action.

Because Australia is predominately a growth market, it is quite likely that even if you buy in property with a good cash flow, you will still need to accomplish some degree of capital growth in order to get the kind of excellent return on investments that you are hoping for.

You practically have free reign over the entirety of Australia because negatively geared properties are basically everywhere. You may choose top target locations that have great growth potential so that you can obtain that capital growth.

Due to the Low Rental Rates, There is a High Demand

Some investors reduce their rental rates intentionally in order to maintain a negative income and maintain their property's negative gearing. By doing so, they increase their chances of keeping long-term tenants and, in the event that one of their tenants decides to move out, they have a larger pool of potential replacements from whom to choose.

The gradual deterioration of a building and its contents over time is referred to as depreciation of the property. Investors who own properties that generate income are eligible to take a tax deduction equal to the amount of the property's annual depreciation. Because depreciation is a non-cash deduction, it is not necessary for an investor to make a financial outlay in order to take advantage of it.

Every investment property has depreciation deductions that can be used to release previously untapped cash flow. The investor's ability to claim depreciation on a property is unaffected by the gearing of the property. In certain circumstances, a property that was formerly favorably geared can become negatively geared as a result of depreciation without incurring any additional losses.

Reduced Income That Is Subject To Taxes

At the conclusion of each fiscal year, an investor who owns a negatively geared property sees a drop in the portion of their taxable income that is attributable to the property. This tax offset can be useful for many different types of investors, but it is especially beneficial for investors who have high marginal tax rates or investors who seek to capitalise on their investment while they are expanding their portfolio.

In order to get a better understanding of how something like this works, let's look at a real-world example.

Joe is an engineer who works for a construction company. Joe's employer is a construction company. The year 2019 marked the year that he made his first investment, which was the purchase of a property. At this time, the property is being leased to occupants who have collectively paid a total of $25,000 in rent for the 2019-20 financial year.

The rental income from the property is offset by the numerous costs associated with maintaining it. Depreciation, interest repayments, insurances, property management fees, and maintenance charges contributed to the total spending amount of $35,000 that was incurred during the 2019-20 fiscal year.

The overall loss for the 2019-20 fiscal year was $10,000 as a direct consequence of this situation. Joe has the option of deducting some or all of this loss from the taxable income that he has earned.

Because of this loss, he is able to save $3,250 on his tax bill, which is a benefit considering that his tax rate is 32.5%. This reduces the overall loss on his investment property down to $6,750, thereby bringing it closer to his original expectations. Given that Joe's ultimate goal is to improve his financial situation over the course of his lifetime, he is not overly concerned about the possibility of suffering a loss of $6,750.

hands exchanging house and money

Another benefit of employing this tactic is the tax advantages that come with negative gearing. You should always speak with your accountant before making any decisions that could have an impact on your taxes because I am not a tax accountant and therefore cannot provide you any tax advice. But if the property in question is an investment property or a negatively geared property, you have the option of deducting the loss of that property from your taxable income in addition to any losses that have resulted from depreciation. You could possibly be eligible for a tax refund.

Investing in properties that are negatively geared has some tax advantages, so even if you are paying out money each month, your monthly loss won't be as great. You might even be able to get more money back from the tax return than you actually put in, depending on the circumstances.

A property that was previously negatively geared could become positively geared as a result of this. Once more, It is important to consult your tax accountant before taking any action connected to taxes.

As was noted earlier, the losses that were sustained as a result of the accumulation of all expenses connected to the negatively geared investment property can be used as a tax deduction on the individual's tax return. Investors that have a negative gearing ratio are able to reduce the amount of annual tax they are required to pay as a result of this.

Purchase Price

The purpose of negative gearing is to help you achieve financial gain by offsetting any losses you may have incurred on investment properties you own. When calculating when you will begin to see a return on your investment, the purchase price of the property in question should serve as your point of departure.

Rental Income

Your rental income is the following consideration in the process of determining your negative gearing deduction. If you want to use your rental property as a source of consistent income, you will need to ensure that the rent you collect from your renters is sufficient to cover the cost of your monthly mortgage payments. You'll need to find a way to balance these costs while maintaining your position as a competitive renter in the local market. It is essential to keep in mind that the monthly payment that you make on your mortgage is not the only expense associated with owning a rental property.

Loan Details

Because negative gearing enables you to deduct the interest you pay from your income, it is crucial that the terms of your loan be carefully considered. The majority of investors choose the option of an interest-only loan, which indicates that they only make payments toward the interest component of the loan and not the principal amount that they have borrowed. When using this plan, the objective is to reduce the amount of money that has to be repaid and then use the proceeds from the sale of the property to pay down the principal. This is also effective when used to negative gearing. As a result of the negative gearing concession, you are able to deduct the interest that you pay on the mortgage on your investment property. If you are simply paying the interest on your house loan, this implies that you can deduct the whole amount that you are paying back.


At first glance, it can look as though you are favourably geared after comparing the amount of your home loan payment to the income from your rental property. However, you are also able to deduct the costs associated with maintaining and renting out your home thanks to negative gearing. These costs include the following items:

  • alterations, maintenance, and repairs;
  • Pest control
  • Upkeep of the grassy area;
  • Council rates
  • Strata fees
  • Property management fees
  • Taxes on the land;
  • Insurance
  • Expenses incurred in the recruitment of renters;


Some of the costs associated with maintaining a rental property cannot all be deducted at once but must be spread out over a period of several years in order to be considered reasonable. These are often things that you've bought for the property that is expected to lose value over time, such as furnishings or appliances. It is also possible to claim a deduction for any modifications that have been made to the property. An upgrade is anything that would result in a fundamental change to the nature of an item that is being replaced or that would add to the overall worth or appeal of the property. Some examples of improvements include getting new curtains or renovating the house.

You may also deduct the costs of any capital works, which refer to the construction of buildings. This would be computed at a rate of 2.5 percent annually for a period of forty years beginning on the day the construction was finished.

Utilize Leverage to Maximize Your Returns

The fourth advantage of negative gearing is that if you are successful in achieving the desired level of capital growth, you will have the option to leverage that growth in order to obtain greater financial returns and broaden the scope of your investment portfolio.

You might be able to take out a loan against the increasing value of your home as it appreciates over time, then put that money toward the down payment on another investment property so that you can broaden your portfolio without having to put any additional cash into these properties.

Growth of Capital over the Long Term

They may also benefit from the property's potential value appreciation if they choose an investment property that is located in a real estate market that has the potential to increase in value. This will allow them to capitalize on the potential value appreciation of the property. They might be able to recoup their financial losses and turn a profit from the sale of the property thanks to the growth in the property's value.

Real estate is an asset that can be touched and is rather stable. Although the market is not stable and has regular shifts, the value of most properties, as well as the rates at which they can be rented, goes up over time.

An investor who holds on to property despite the fact that it has a negative cash flow may have their sights set on making a profit in the future either through the sale of the property at a higher price or through the receipt of greater rental returns. This financial gain over the long run typically compensates for the loss over the shorter period.

The Possibility to Add Value (Nearly) Instantly

The opportunity to increase value almost immediately is the fifth benefit of investing in real estate. This can be accomplished through projects such as renovations or subdivisions, in addition to a wide variety of other strategies.

If you buy a negatively geared property that is either in disrepair or has been on the market for an excessive amount of time and as a result, you got a great deal, you may have the opportunity to increase the value of that property by putting in some hard work and making it more appealing to the buyers in your target market. This will allow you to capitalize on a great deal you got.

As can be seen, negative gearing is a very frequent investment strategy, and there are some significant benefits that come along with using it.

Who has the greatest gain from using negative gearing?

Because they stand to benefit the most from tax deductions, investors who are already subject to a higher tax rate are the ideal candidates for negative gearing because of the higher rate at which they are already being taxed (which are calculated on your marginal tax rate). The size of the benefit grows in a manner that is directly proportional to the level of the tax.

Investors that are more interested in generating a capital gain (that is, a profit when they sell the property) than in raising their rental return may choose to take advantage of negative gearing as an investment strategy (income from renting your property). People who have modest incomes or who are interested in making money through rental property should give some thought to the possibility of positive gearing, which is an option that is available to them.

A loss when it comes to the books, but a positive cash flow. How exactly does that function?

In the realm of real estate investing, the quest for the holy grail consists of coming out monetarily ahead yet giving the impression that one has lost money. Either you need to have a financial counsellor who is knowledgeable with all of the tax-deductible depreciation limits or you need to be conversant with all of them yourself. Because depreciation allowances are capped at a specific point in time and are calculated based on the progressively falling value of new items from year to year, the more recent your property is, the greater the depreciation allowances will be. The value of the paper they are printed on decreases over time, which can have a considerable effect on your tax return, despite the fact that they do not directly cost you any money.

Taking into account that your investment property cost you $15,000 but brought in only $10,000 in rent, you have a loss of $5,000 for the year as a result of your investment.

If you were subject to a tax rate of 47 percent, you would be able to realise a benefit of $2,350 by lowering the amount of your taxable income that is subject to taxation. On the other hand, if you were subject to a tax rate of 19 percent, you would only be able to realise $950 in deductions.

Now, if you added in depreciation costs, which are simply the declining value of new fixtures and are not a tangible cost, of $8,000 on a new property (bringing your total losses to $13,000), the benefits for the investor in the higher tax bracket jump to $6,110, whereas the investor in the lower tax bracket only receives $2,470. This is because depreciation costs are simply the declining value of new fixtures and are not a tangible cost.

The individual who comes in a greater income actually ends up with a profit of $1,110 when depreciation is included in, whereas the individual who brings in a lesser income is still $2,530 in the red after incurring an initial loss of $5,000 in physical assets.

If you are subject to a high tax rate and want to see a long-term increase in the value of your investment, you should talk to a financial adviser to determine whether or not investing in real estate would be a good choice for you. Although it can be difficult to understand, doing so is important if you want to maximize the return on your money.

Those who are younger are the ones that suffer the most from negative gearing

Not only has the practice of negative gearing contributed to an increase in home prices, which has driven young people away from the market, but the vast majority of tax breaks are also given to persons who are over the age of 40. Those who are over the age of 40 are eligible for around 70 percent of the benefits of negative gearing, while those under the age of 40 are only eligible for 30 percent of the benefits. The young population will suffer twice as much as a result of this. They are unable to take advantage of the tax concession for negative gearing, and they are being priced out of the home market as a result.

Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing

When Might It Be a Good Thing to Lose Money?

In light of the information that has been provided thus far, it is highly likely that you will want to aim for positive gearing the majority of the time. Who, after all, desires for their investments to wind up costing them more money than they are making? However, real estate investors in Australia have long been aware of the benefits that come with placing their assets under negative gearing. This is because of the widespread practise of property investing in the country.

One of the most major perks that comes with owning a property that is negatively geared is the opportunity for an increase in the property's value at some point in the future. In spite of the fact that negative gearing makes it possible to make a profit in the short term, investors in real estate may be able to benefit from a financial increase in the long term if the value of the negatively-geared property increases. This is because negative gearing makes it possible to make a profit. For instance, if you purchase a home that has negative gearing but is able to sell it for more than you paid initially as well as the additional costs, you will be in a better financial position than if you had purchased a property that had positive gearing. This is because you will have been able to recoup more of the money that you initially invested in the home.

You are able to deduct that loss from any other money you bring in, with a wage being the most common form of source of revenue. If you are self-employed, you can deduct that loss from any money you bring in. This is an additional advantage that can be gained from using negative gearing. Your taxable income has actually decreased as a direct result of the negatively geared property you own, which indicates that the costs associated with the property are now being covered by rent, tax deductions, or maybe even other forms of surplus cash flow or savings.

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