Property 101: Negative gearing and tax

GUEST OBSERVATION

If you’re looking to invest in property, it’s important to understand what gearing is and how you can use it to maximise the returns on your investment.

Gearing is where you borrow funds to invest in property, shares or other types of investments. It allows you to increase the amount you have to invest and offers a range of potential tax benefits.

What is negative gearing?

Negative gearing occurs when the expenses on your investment are higher than the income you receive. As your investment is making a loss, you may be able to offset your expenses against other income such as salary or wages, potentially reducing your tax.

For example, if your mortgage repayments and the costs of managing your investment property are more than the rent you receive from tenants, your property could be negatively geared.

In addition to taxation benefits, negative gearing offers an opportunity to make a long-term profit through capital gains—where the value of your property increases greater than the costs.

What is positive gearing?

Positive gearing is when the rent from your investment property is higher than costs such as loan repayments, interest, property maintenance and rates. It tends to happen at times when rental rates are high and interest rates are low.

Understanding the risks

Negative gearing can be more risky than positive gearing and is only recommended when capital gains are expected in the long-term. If the value of your property falls or interest rates increase, you may need to pay additional costs that aren’t covered by potential tax deductions.

Gearing is complicated and it’s best to talk to a financial planner and accountant for professional advice before making any long-term commitment.

Tax deductions on your investment property

There is a range of potential tax benefits available on your investment property.

Expenses you may be able to claim include:

• Advertising for tenants
• Insurance
• Some legal expenses
• Body corporate fees and charges
• Property agent fees and commissions, as well as travel costs to inspect the property
• Land tax
• Capital works and decline in value of depreciating assets
• Repairs and maintenance
• Cleaning, pest control, gardening and lawn mowing
• Council and water rates.

Some costs can be claimed immediately and others can be claimed as depreciation over a number of years. You’ll need to keep records of all expenses, plus legal records of property ownership for at least five years.

Visit the Australian Tax Office (ATO) for the latest information on what you can claim, or talk to your accountant for tax advice that’s specific to your situation.

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