Tax benefits of negative gearing

Essentially, the investor is incurring a loss and will, thus, have to pay for expenses from their own pocket. Should they be unable to gain access to extra cash regularly to cover ongoing expenses, they may be forced to sell the property at a loss.

As risky as it sounds, many investors continue to incorporate negative gearing into their long-term strategy.

Incurring an investment loss means that the investor reduces their taxable income. Therefore, the amount of tax that they pay is also reduced. The tax saved by negative gearing may be put towards the payment of investment expenses moving forward.

Moreover, since the overall tax result of a negatively geared property is a net rental loss, the investor may claim a deduction for the full amount of rental expenses or ‘total net rental property loss’ against their all of their income—rent, salary, wages and business, if applicable—come tax time.

According to the Australian Taxation Office: “The amount of the loss is included in your adjusted taxable income and may be used in calculating various tax obligations, tax offsets and entitlement to other tax related concessions.”

“Where the other income is not sufficient to absorb the loss it's carried forward to the next income year.”

The savings generated from the tax deductions may also allow investors to finance the expansion of their portfolio over the long term.

Expenses to claim

Investors can generally claim all property-related expenses within the period that it is rented or genuinely available for rent.

These include revenue deductions or management and maintenance costs, which can be claimed immediately, as well as borrowing expenses, depreciation and capital works spending, which can be claimed over a certain period.

Immediate deductions can be claimed against expenses related to advertising for tenants, body corporate fees and charges, council rates, water charges, land tax, cleaning, gardening and, lawn mowing, pest control, insurance, interest expenses, property agent's fees and commission, repairs and maintenance and some legal expenses.

On the other hand, expenses that may be deducted over a number of income years include borrowing expenses, decline in value of depreciating assets and capital works.

To determine the deductible amounts for properties available for rent for only part of the year, properties that are not entirely used for rent and properties rented at non-commercial rates, investors will have to apportion expenses and, in some cases, spread their deductions over multiple years.

Investors are not allowed to claim expenses that are not directly paid by them, such as water and electricity charges, which are paid for by tenants. Acquisition and disposal costs, as well as GST credits, are also not considered as deductions that can be claimed.

Isn’t losing money a bad thing?

While most budding investors would immediately aim for positive gearing, naturally wanting to avoid any kind of loss, some sophisticated investors understand that there are positives to negative gearing.

For one, negatively geared properties usually have a good potential for capital growth. As long as the investor purchases in a location with strong fundamentals for future growth, negatively geared properties are often bound to see good returns within a normal market cycle, between seven to 10 years.

More often than not, the gains from capital appreciation outweigh the losses incurred over time. If the investor sells at the right time – that is, when the value of the property exceeds the purchase price and costs incurred – then they will have ultimately gotten their time and money’s worth.

Further, investors can offset the loss against the income that they earn, including salary, wages and business income.

Essentially, with enough cash flow and safety buffers to shoulder ongoing costs, the investor will have property-related costs paid for by their tenant through rental returns, by the Australian Taxation Office through tax savings and by their own surplus cash flow.

Negatively geared properties also offer investors the opportunity to add value to their asset immediately through renovations, subdivisions or other improvements to the existing building.

Before ultimately making any major investment decision, investors are strongly encouraged to do their due diligence and engage professionals as needed, in order to get a better understanding of the strategies that will be fit for their wealth-creation journey based on their personal and financial goals, capabilities and limitations.

This information has been sourced from the Australian Taxation Office (ATO), Australian Securities and Investments Commission (ASIC) and the Smart Property Investment website.