By Tristan Lindner, Partner, Downing & Lindner Accountants
Negative gearing is a common strategy used by Australian property investors, particularly those looking to build long-term wealth through real estate. In simple terms, a property is negatively geared when the costs of owning and operating the property exceed the rental income it generates.
These costs may include loan interest, council rates, insurance, property management fees, maintenance, depreciation, and other allowable expenses. Where a net loss arises, this loss can generally be offset against the investor’s other taxable income, such as salary or business income, reducing their overall tax liability for the year.
The primary attraction of negative gearing is therefore not the immediate cash flow, but the combination of tax benefits and the expectation of capital growth over time. Many investors are prepared to absorb short-term losses in anticipation that the property’s value will increase, allowing them to realise a capital gain when the property is eventually sold. Where structured appropriately the tax to pay on the capital gain can potentially be halved due to the CGT general discount available for property held longer than 12 months.
However, negative gearing is not without risk and should be approached carefully. Investors must ensure they can comfortably service loan repayments and out-of-pocket costs, particularly if interest rates rise or rental income falls. Capital growth is not guaranteed, and a property that does not perform as expected can place strain on personal cash flow.
Other key considerations include the impact of capital gains tax on sale, changes in personal tax rates over time, and the suitability of the strategy given the investor’s broader financial goals. Negative gearing should be viewed as part of an overall investment strategy rather than a tax-driven decision alone.
As always, tailored advice should be sought to ensure the strategy aligns with your financial position and objectives & we at Downing & Lindner Taxation & Business Services would love to receive your call to talk through these considerations.