If you’re a property investor or looking to become one, it’s important to understand what negative gearing is, and the possible benefits and risks that come with it.
What is negative gearing and what is positive gearing?
Gearing is when you borrow money to invest, and it’s typically talked about in the context of investment properties. The income earned from your investment property is either positively or negatively geared.
- A property is positively geared when your rental return (the amount of rent you receive from your tenants) is higher than your interest repayments and other property-related expenses (e.g. strata levies, council and water rates).
- A property is negatively geared when your rental return is less than your interest repayments and other property-related expenses.
Negative gearing benefits
The key benefit of negative gearing is that any net rental loss you incur during the financial year may be offset against other income you earn, such as your salary.
This reduces your taxable income and how much tax you have to pay.
Positive gearing benefits
The income you get from a positively-geared property can put more money into your pocket and help you more confidently meet your loan repayments. It can also help you set money aside to spend on other things.
Rental expenses you can claim as tax deductions
According to Australian tax law, you may be able to claim the interest portion of your loan repayments and some other rental expenses as tax deductions, provided your property is rented or available for rent.
Positive or negative gearing – which option is best for you?
As with all investments, your strategy should be aligned to your personal circumstances and risk preferences. You should consider talking to a professional financial advisor, accountant or tax specialist if you’re thinking about investing or already a property investor.
To find out more about what you can and can't claim on a rental property, visit the Australian Taxation Office (ATO) website.
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