What is Negative Gearing?

Negative gearing is a term commonly used in Australia to describe a situation where the costs of owning an investment asset exceed the income it generates. In property investing, this usually happens when the rental income from an investment property is less than the expenses associated with owning it.

Those expenses can include interest on a loan, property management fees, maintenance costs, insurance, council rates and other deductible rental expenses. When expenses are higher than income, the property makes a net rental loss.

Negative gearing explained and tax treatment in Australia

In Australia, when a rental property makes a net loss, that loss can generally be offset against other taxable income, such as salary or wages. This may reduce a taxpayer’s overall taxable income for the year.

Negative gearing does not create income. Instead, it can reduce the amount of tax payable when the rental loss is applied correctly as part of a tax return. The exact tax outcome depends on individual circumstances, including income level, ownership structure and the type of expenses claimed.

How negative gearing works and potential outcomes

Some investors accept short-term rental losses because they believe the value of the property may increase over time. While rental income may not fully cover expenses in the early years, the expectation is that long-term capital growth could outweigh those losses.

If the property is eventually sold for more than its purchase price, capital gains tax may apply. Depending on how long the property is held and the taxpayer’s situation, a capital gains tax discount may be available. Market conditions and personal circumstances play a significant role in determining whether this outcome is realised.

Negative gearing and rental property expenses

Rental property expenses must be directly related to earning rental income to be deductible. Only legitimate expenses incurred during the period the property is available for rent can generally be claimed.

Accurate record keeping is essential. Claiming incorrect or private expenses may result in adjustments, penalties or interest charges. Understanding which expenses are deductible and how they are apportioned is a key part of managing a negatively geared property.

Key considerations when using negative gearing

Negative gearing is not suitable for everyone. While it may reduce taxable income, it also means funding an ongoing cash shortfall. This requires stable income and the ability to manage higher costs over time.

Investors should also consider interest rate changes, rental vacancy periods, maintenance costs and broader market conditions. Negative gearing outcomes can change over time, particularly if interest rates rise or rental income decreases.

How H&R Block can assist with negative gearing tax matters

Negative gearing involves detailed tax rules around rental income, expenses, ownership structures and reporting requirements. Ensuring everything is recorded and reported correctly is critical.

An H&R Block Tax Expert can help confirm which rental expenses are deductible, ensure losses are applied correctly and check that your tax return reflects your circumstances accurately.

Estimate your tax position with rental losses

Understanding how rental losses affect your overall tax position can be complex, particularly if you have multiple income sources. Estimating your tax outcome can help you plan ahead and avoid surprises at tax time.

Key takeaways on negative gearing

Negative gearing occurs when rental property expenses exceed rental income, creating a loss that may be offset against other income for tax purposes. While it can reduce taxable income, it also involves ongoing costs and financial risk. Outcomes depend on personal circumstances, market conditions and long-term property performance.