If your interest and running costs add up to more than your investment income you make a loss which is called “negative gearing”.

The aim of this strategy is to benefit from getting into the market early and over time increasing your investment income to cover your expenses.

You are normally permitted to claim the net loss as a tax deduction against your other income.

Example of tax savings

For example, you are an employee who earns $80,000 in your job and owns a rental property. This property collects $20,000 per year in rent and costs $30,000 per year in interest and running costs.

The loss on the property of $10,000 reduces your taxable income from $80,000 to $70,000, thereby saving you 30% tax on that reduction, being $3,000. You can see that the after-tax loss on negative gearing is $7,000 and is cushioned by the tax reduction you receive.

It is possible for you to vary the tax withheld from your pay rather than to receive this tax saving as a refund at the end of the year.

Negative gearing has a major effect on the tax collected by the Australian government, reducing it by $0.6 billion in the 2001/2002 financial year, $3.9 billion in 2004/2005 financial year and $13.2 billion in 2010/2011 financial year.

Combining depreciation and negative gearing

Consider the same case, but here you also claim depreciation benefits on the property. Say your rental income is $20,000, costs are $30,000 and depreciation claim is $5,000. Your cash loss for the year is still $10,000, but your net rental loss for tax is $15,000.

Your taxable income reduces from $80,000 to $65,000, thereby saving you 30% tax on that reduction, being $4,500. So your after-tax loss reduces to $5,500.

The goal of investing is to make a profit!

If you are making a loss on your investment property each year then sure you’re saving on tax, however you are still losing money! The reason that investors often invest in negatively geared property is that the growth in the property usually outstrips the holding costs.

When you eventually sell the property you pay capital gains tax on the profit from the sale, however the tax benefits of negative gearing helps you to hold more investment properties without impacting your lifestyle.

Positively geared property

While most investors rely on the capital gain to make a profit, some hold their properties for long term in which case the properties often become positively geared.

This happens because the rent increases over time however the loan amount does not, so eventually the rent income is more than the holding costs of the property.

Some investors buy properties with exceptionally high rent returns which means they are positively geared from day one. In some cases these properties experience lower capital growth.

If a good property is picked then it may be possible to get the winning combination of a high growth rate and a high rental return.

Although positively geared properties do not have the same tax benefits of negatively geared property, keep in mind that the goal of investing is to make a profit, not to avoid tax.

For this reason positively geared properties are excellent investments if they also have high capital growth.

How do lenders assess negatively geared properties?

Did you know that some lenders do not take negative gearing benefits into account when assessing your ability to afford a debt? In addition to this most lenders do not use the full amount of your rent income in their assessment.

Professional investors should have a strategy in place to use several lenders to achieve their investment goals. This allows them to maximise their borrowing capacity, manage their exposure to each LMI company and lender as well as to avoid cross securitisation of their portfolio.

If you need help with your investment mortgage then please call us on 1300 889 743 or enquire online and one of our mortgage brokers will call you to discuss your options.

Can I move my home loan to my investment property?

What if you have a large loan on your home and no debt on your investment property?

Unfortunately you can’t just move your home loan onto your investment property and get a tax deduction.

The ATO looks at the purpose of the loan, not what it is secured on so moving the loan over doesn’t change what the funds were originally for and will not make the interest tax deductible.

Speak to an experienced accountant

This information has been provided by Lucentor Pty Ltd who are accountants that specialise in tax for property investors.

We recommend investors obtain financial advice specific to their situation before making any investment or decision regarding their finances.

  • Miley S

    Which one’s better though, negative gearing or positive gearing?

  • Hi Miley S,

    Generally, any one can be better than the other depending on your personal situation and your objective. Positive gearing will give you cash in hand but you’ll be taxed on it. Negative gearing offers tax benefits but can make it harder for you to build a portfolio because of the decreased cashflow. It’s always a good idea to speak with a professional accountant or financial adviser before you go for either strategy :)

  • tunbridge

    What is an easy way to estimate whether my property will be negatively or positively geared? I have done different calculations but they are not consistent with different figures.

  • Hey tunbridge,

    You can have a crack at our investment property cashflow calculator to accurately estimate the weekly cashflow position of your next investment property and through that determine whether your property be positively or negatively geared. Here’s the link to the calculator:

  • RiddocH

    May I have some tips / advice regarding managing cash flow with a negatively geared property?

  • Hi RiddocH,

    We can’t give you any financial advice and it’s recommended that you speak with a professional financial adviser or your accountant. However, we do have some tips and suggestions regarding this, which you can check out on the ‘Manage Cash Flow When Negative Gearing’ page:

  • Ari

    I’m sure I’ll be negative gearing my next IP but I’m not sure if I should go residential or commercial. I know about residential but can you help me with some info on commercial property investment?

  • Hey Ari,
    Commercial properties achieve higher rental income overall compared to residential real estate. If you choose the right freehold commercial property, you can achieve anywhere between 8% and 10% or even up to 20%. However, there are many things you should consider before taking the leap.

    Please check out the commercial investment loan page to find out all about this:

  • Dakary

    Hi team. I own 2 investment properties. I wanted to know whether I can add depreciation of the investment property while claiming tax benefits?

  • Hi Dakary,
    Usually, Australian tax laws allow you to claim depreciation benefits on an investment property, which will help you to lower your taxable income and pay fewer taxes. To get the maximum benefit without breaching ATO tax rules, it’s always best to speak with your accountant.

  • Darrell

    Hey there, I’m looking for a spreadsheet to use to see where I am with my negatively geared property. I’m currently trying to turn it positive, can you point me in the right direction?

  • Hi Darrell,
    We have a negative gearing calculator which calculates your weekly cash flow: https://www.homeloanexperts.com.au/mortgage-calculators/negative-gearing-calculator/
    We also have an investment property income & expenses spreadsheet you can download: https://www.homeloanexperts.com.au/wp-content/uploads/2011/08/Investment-Property-Income-Expenses.xlsx