Negative gearing is something that’s often in the news. If you’re a current or potential property investor, it’s important to understand exactly what negative gearing is and the possible benefits and risks that come with it.
Positive and negative gearing
Gearing is when you borrow money to invest, and it’s most often talked about with regard to investment properties. The income earned from your investment is usually positively or negatively geared.
A property is positively geared when the rental return (the amount of rent you receive from your tenants) is higher than your interest repayments and outgoings.
A property is negatively geared when the rental return is less than your interest repayments and outgoings.
What you can claim
According to Australian tax law, you may be able to claim the interest portion of your loan repayments and also some other costs as an expense, providing the property is available to be rented.
The key benefit associated with negative gearing is that any loss may be offset against other income earned, such as your salary, reducing your taxable income and therefore your tax payable.
Some things to know
While negative gearing can have financial benefits, there's often a lot more to investment properties than reducing tax.
The income from positively geared properties, for instance, can help to improve buying power by putting money into your account and can increase your ability to meet repayments.
In general, taxpayers with a higher taxable income may choose a negatively geared investment property in order to claim any loss on the property against their other taxable income. They may also benefit from any long-term capital growth potential.
Investors closer to retirement or in a lower income bracket may choose positively geared investments to maximise their income potential.
As with all investments, strategies should be aligned to personal circumstances and risk preferences. You should consider talking to a professional financial adviser or accountant or tax specialist if you are thinking about investing.
To find out more about what you can and can't claim on a rental property, visit the Australian Taxation Office (ATO) website.