Last Updated: 30th December, 2022

In Australia, and some other countries, property owners are allowed a tax deduction for losses from negatively geared properties.

It is important to understand what negative gearing is and how it works before setting foot in the world of investment properties. It could mean thousands, or even millions of dollars.

What Is Negative Gearing?

Negative gearing is a property investment strategy where the cost of owning a property is higher than the rental income that it generates each year.

Gearing is financial jargon that means one has borrowed money to buy assets. If rental yield on an investment property isn’t enough to cover the mortgage and interest repayments, those costs will be coming out of the investor’s pocket.

Despite this expense, negative gearing remains a popular property investment strategy. Why?

What are the benefits of negative gearing?

There are some huge benefits for those who choose to negatively gear their investment properties.

Here are the two most important advantages:

1. Tax minimisation

Despite its name, negative gearing has a positive relationship with the investor’s income taxes. Property owners are allowed to deduct rental losses from their taxable income. The rental loss is the total cost of owning the property for the year, minus the rental income. Not only can Australians deduct the rental loss, but also all other related expenses such as maintenance costs and furniture depreciation.

This is a popular method of tax minimisation used by high-income investors.

2. Capital gains

The ultimate reason people are investing in property knowing very well that it will not yield any profits for some years is that they are hoping they will be able to bag a much bigger amount in capital gain when prices rise in the future.

Given the trend of rapidly rising property prices, chances are high that these investors will make a huge profit if they hold onto the property and are able to sell at the appropriate time.

What are the disadvantages of negative gearing?

After learning about the two main advantages of negative gearing, one might want to immediately employ this strategy. However, there are disadvantages:

1. Lower Cash Flow

With negative gearing, some of the expense of ownership comes out of the investor’s pocket.

This reduces cash flow. But there are some tips you can use to manage cash flow when negatively gearing.

2. Capital Losses

A profitable sale is part of a negative gearing strategy but it doesn’t always materialise. There are cases where, even after decades of waiting, the opportunity to sell a property at a profit never comes.

Who Can Benefit From Negative Gearing?

An investor must have certain things in place to benefit from negative gearing: