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Negative gearing tax benefits

People commonly start investing in order to generate income and meet financial objectives. Some investors, however, are prepared to accept losses in exchange for future gain – and one of the ways they generate loss is through negative gearing.

Gearing is a strategy wherein borrowed money is used to purchase an investment asset. Negative gearing is when the interest on the loan amount exceeds its net rental income.

Some property investors negatively gear their investment property to claim tax offsets that are allowed by the Australian Taxation Office (ATO). Below are the three tax benefits of negative gearing that investors can claim.

Tax deduction
Tax loss
Marginal tax rate adjustment


Tax deduction

At the time that the property was rented or was genuinely available for rent, negative gearers may claim the full amount of their net rental loss as a tax deduction. That is, the full amount is deducted from their tax payable for the relevant income year.

Doing so effectively lowers the amount of tax the investor has to pay and can even bring it down to nil.

Tax loss

In cases wherein the net rental income exceeds the investor’s tax payable, they may carry over and apply the remaining loss to the next financial year.

Individual investors may indefinitely carry forward their tax loss, but they are not allowed to let their losses accumulate to be used at a time of their choosing. Likewise, they cannot choose which loss to apply first because ATO rules require that “losses must be claimed in the order in which they were incurred”.

Marginal tax rate adjustment

Another option for those whose net rental loss exceeds their tax payable is to request the ATO to adjust effective marginal tax rate or the amount that is withheld from their income.

This means that, instead of simply deducting losses from their tax payable, they may request to apply the tax loss on their assessable income so that they may be classified into a lower tax bracket.

Isn’t buying a losing investment too risky?

Most investors naturally avoid investments that expose them to great risks and are sure to lose money, so what could possibly entice some to accept risk and income loss from negative gearing?

There are two things that make negative gearing attractive:

  1. Tax benefits
  2. Potential capital growth

Tax benefits
The tax benefits negative gearers may claim have been discussed above. However, investors can only benefit from tax offsets if they satisfy the conditions set by the ATO. Only the following expenses may be claimed immediately:

  • Expenses that are directly paid for by investors
  • Expenses incurred during the time the property was rented or was genuinely available for rent

On the other hand, tax deductions on the following expenses must be spread out over several income years:

  • Capital works spending
  • Decline in value of depreciating assets
  • Borrowing expenses

With an effective strategy for a negatively geared property, an investment property could be paid off using the investor’s extra income and the property’s rent income and tax deductions from the ATO.

Potential capital growth
In most cases, carefully selected negatively geared properties are located in areas with a good potential for value appreciation. This means that, with a properly selected negatively geared property, the gains can outweigh the losses once the property is sold.

Despite potentially large future gains, however, investors must remember that gearing strategies are more complex than they seem. It is highly recommended that they do due diligence and seek the advice of a licensed professional before making any investment decision.

This information has been sourced from the Australian Taxation Office, the Australian Securities and Investments Commission and Smart Property Investment.

Negative gearing tax benefits
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