What is Negative Gearing?

Negative gearing has been a hot topic over the past few years, with the recent changes to deductions available against rental income. For those interested in investment properties it's important to know the ins and outs.

Are there advantages to losing money?

Australia's income tax laws often enable taxpayers to offset losses, which they incur in one field of economic activity, against profits from another economic activity.

Most commonly, the total amount you earn in rent is going to be less than the amounts you spend on your rental property. This means that you've actually made a loss on your rental property and Australia's current tax law allows you to offset this loss against other income.

How do people make money?

People tend to make money off negative gearing through a series of small, annual losses on their rental income. However, at the end of the day, you can make a potentially large capital profit when you sell because you are effectively taxed at half rates due to the Capital Gains Tax discount.

Let's take an example of a negatively geared property in Australia. Let's say that John owns a rental property generating $25,000 in rent each year. The costs of holding the property, including mortgage interest, come to $30,000. This gives John a loss of $5,000, which will reduce his taxable income. If he is in the 45% tax bracket (plus 2% medicare), this will reduce his tax by  $2,350 ($5000 x 47%). John is still out of pocket, but if housing prices are rising, he hopes the capital gain will be sufficient to compensate for this.

3 tips for negative gearing

With all of this in mind, there are three key things to consider:

• for negative gearing to work you must be operating in a time of rising house prices
• negative gearing is best at the top income tax rates, because these brackets give the biggest tax breaks. As you go lower in tax brackets, the benefits shrink
• finally, this strategy for negative gearing relies on the tax law staying as it is.

H&R Block can help

To get the best advice possible on negative gearing find your nearest H&R Block office and book an appointment.

Calculate your tax refund

Calculate the tax refund you  could receive after tax deductions with H&R Block's easy-to-use, accurate income Tax Calculator.