What is negative gearing?

What is negative gearing?

Published Fri 3 May 2024 • 6 min read

A quick introduction to the potential positives of negative gearing

You may have come across the term ‘negative gearing’. But what exactly does it mean? And what's the difference between negative and positive gearing anyway? Let’s look at some of the positives and negatives of the popular property investment strategy.

First things first: what is gearing?

The term gearing simply refers to when you borrow money to invest in an asset that creates income, like an investment property.

What is negative gearing?

Negative gearing is when the cost of owning an asset is higher than the income it generates.

It’s a popular property investment strategy in Australia because, when eligible, the Australian Taxation Office (ATO) lets you claim the loss as a deduction against your taxable income.

Benefits of negative gearing

Negative gearing may help reduce your taxable income and how much tax you pay.

Here's how it works

Say you take out a $400,000 home loan with a 5.25% p.a. interest rate to purchase an investment property. It costs you $21,000 in interest a year, plus you also spend $4,000 in insurance, maintenance, renovations and council rates, bringing your total yearly cost to $25,000.

Meanwhile, you rent out the property for $380 a week, which creates an annual rental income of $19,760. That means there’s a $5,240 loss ($25,000 - $19,760) which you may be able to claim as a tax deduction.

So even though owning an investment property may return a loss, short term you could benefit from tax savings if you choose to negative gear. For instance, using the example above, if your taxable income is $85,000, it could be reduced to $79,760 ($85,000 - $5,240).

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Things to consider before negative gearing

If the cost of owning a property is creating a loss, you’ll need income from another source to ensure you can cover your loan repayments and other property expenses.

There are also the usual investment property risks, like if you can’t find a tenant, missed rental payments, unforeseen property expenses or if your property loses value.

Plus, if you have a variable rate loan, your repayments could rise if rates go up.

What is positive gearing?

Positive gearing is when income from owning an asset is higher than the cost of owning it.

Here's how it works

Let’s revisit the earlier example where you have a $400,000 home loan with a 5.25% p.a. interest rate. The cost of interest is still $21,000 however you only spend $1,200 on insurance and rates, adding up to $22,200 for the year.

Meanwhile, you rent out the property for $445 a week creating an annual income of $23,140. That means there’s a $1,140 gain ($23,140 - $22,200) from owning the property.

More about positive gearing

Positive gearing means you earn more than it costs to have an investment property, which can make it easier to cover your loan repayments or look to invest elsewhere because you may have more cash.

Because you’re earning a return with every rental payment received, you do not need to wait until tax time for any potential benefits.

But remember, positive annual income from an investment property is taxed at your marginal rate.

What is capital gains tax?

Capital gains tax (CGT) is the tax on the net profit you make from selling an investment property. For example, if you bought an investment property for $400,000 and sold it for $460,000, your capital gain is $60,000 which you may need to pay CGT on.

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Start your application online or call us on 1800 100 258, 8am-8pm Mon-Fri and 9am-5pm Sat (AEST/AEDT).
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