Demystifying Negative Gearing

26-03-24 09:51 AM Comment(s) By Joean

What is negative gearing and is it important?

Negative gearing refers to the ability to offset any property investment losses against the gains - although it's not particular to property, but is also relevant to other investment classes. Australia is one of the countries that allow such a structure, although we're not alone, with Norway, Japan, Canada and Germany all having similar systems in place. There are some other countries such as France, Ireland, America and Finland that have provisions for offsetting losses against future rental income, but not wages income. Sweden and Spain do not allow negative gearing as such, however, have some allowances for rental expenses to help reduce overall tax liability.

When this policy is paired with our ability to leverage debt (namely, the bank's money) to invest in property, it becomes a particularly attractive asset class for investors. We have a system that allows for just a 10% - 20% down payment, the potential for interest only repayments on the loan, and all losses associated with keeping the property to be offset against the income, or rent money and then deducted from our wages to form our 'taxable income'. Thereby reducing the tax we pay and keeping more money in our pockets, while growing wealth through property.

This is a structure that helps to maximise the cashflow to allow investors to hold the property for long enough, without too much stress on their lifestyle, in order to realise the capital growth.


In time, the rental income should grow and outperform the non-cash deduction in the form of depreciation, once it's no longer able to be claimed.

Political history has shown us that trying to change the structure of negative gearing in this country is career-ending, and as such, the present system places no restrictions on tax payers to negatively gear. Regardless of the income of the taxpayer, the amount of investment properties, the size of the losses, or the period over which the losses can be claimed.


The only restriction relates to depreciation and the ability to claim depreciation on new fixtures and fittingsFor this reason, investing in new builds and new property is often preferred by savvy investors, whose primary purpose for investing is to reduce their taxable income.

Investors often say things like, I don't want a negatively geared property, however what they're actually saying is that they don't want their property to have negative cashflow. While it sounds like it's the same thing, it's not, due to the non-cash portion in the form of depreciation. Being able to return more cash into your pocket is always going to be a good thing, there are many other variables to consider to find a good investment. The cash aspect is one part but growth is where you'll make the most from your investment.

Knowing where to invest and what time, what the risks are, as well as the opportunities, knowing who to trust, they're far more important.
If you'd like to learn more about this topic and what makes for a good investment, book in to chat to a property specialist at Calla Property. You won't be sorry.
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