Negative gearing is arguable the most generous tax break available to Australian property investors.
Whether you’re an established property investor or contemplating purchasing your first investment property, you may care to familiarise yourself with the way that negative gearing works.
A property is considered to be negatively geared if the owner has taken on debt in order to acquire it and the net rental income is less than the costs of maintaining the property (including the interest paid on the loan).
Investors with negatively geared properties are able to claim the shortfall between their associated costs and rental income as a deduction against their total taxable income. In the event that your taxable income is insufficient to absorb the difference, the remaining deduction can be carried forward to the next financial year.
May Australians would not be able to the enter the real estate market without taking on some form of debt. While taking on debt allows you to make investments that would otherwise have been beyond your reach, it also ramps up your risk profile because you will have a greater amount invested. Furthermore, if your investment property is underperforming, you remain responsible for making loan repayments.
Obviously, it is preferable to have an investment property that is positively geared, meaning that rental income covers loan repayments, interest and routine maintenance. Paying tax on a profit is typically considered to be a better option that minimising your tax liability while making a loss. Investors who have long term negatively geared properties are generally hoping to incur long term profits from capital growth.