How does negative gearing work?
When talking about ‘gearing,' this refers to borrowing funds to invest in an asset. Positive gearing occurs when the income generated by an investment exceeds the costs of holding it. Negative gearing occurs when the income generated by an investment is less than the expenses associated with holding it.
At first, negative gearing may sound like a losing strategy, but some property investors offset the loss against other taxable income. Doing this can be risky, so understanding exactly how negative gearing works is essential to a successful investment endeavour.
How does negative gearing work?
Negative gearing is when you’re operating your rental property at a loss. For instance, if the rental income you receive doesn’t fully cover the repayments on your investment loan or other maintenance costs, you’ll have to pay out of pocket to make up the rest.
With rental properties, there’s always a chance you may not make an immediate profit. By negatively gearing your property, you can somewhat offset the net loss you make. It’s a strategy that relies less on profit from tenants and more on the projected long-term growth of the property.
Previously, property investors were abel to use the loss on the rental property as a tax deduction from salary or taxable income. However, a recent change to negative gearing has abolished tax deductions from salary/wages or other taxable income starting 1 July 2027 for established residential properties purchased after 12 May 2026 at 7:30 PM AEST.
Starting 1 July 2027, losses from relevant investment properties can only offset rental income or future capital gains. Offsetting of losses can be carried over to future years.
What’s the latest negative gearing change?
After 12 May 2026, when you negatively gear a property, losses can only offset rental income from other rental properties or future capital gains upon sale. Losses incurred by the established property cannot be used to reduce income tax. Excess losses can be carried forward in the future.
Investment properties purchased or under binding contract before 12 May 2026 at 7:30 PM AEST will not be affected by the change. If you bought the property before the deadline, it may still fall under the previous negative gearing rules.
There is an exemption to the new negative gearing rules for new residential builds. If you’re constructing a new residential property, you may still be able to offset losses against your salary/wages or other taxable income. However, it's best to speak with a tax professional or accountant regarding this.
Why do investors use negative gearing?
When your property is negatively geared, you’re essentially operating at a loss, which seems quite antithetical to the whole concept of investment. So, why do people do it? Negative gearing has a few key benefits that can make it worthwhile for some property investors, such as:
- Potential tax incentives – Under the new rules, losses from affected properties may be carried forward to offset future rental income and eligible capital gains.
- You can recoup costs when selling – Having a property that’s making an annual net loss can be an acceptable trade-off if the property is expected to go up in value. You might make a loss on the property for a few years but could make a profit that negates any losses from the property’s increased value when you sell.
What do you need to look out for with negative gearing?
While these benefits can make negative gearing seem worthwhile, there are also drawbacks you need to be aware of before making a decision.
- Increased value isn’t promised – If you’re relying solely on the property value increasing despite there being no guarantee that this will happen, negative gearing may not be the strategy best suited to you.
- No passive income – Many people choose to invest in rental properties to generate passive income, grow their wealth, or build a property portfolio. However, if your property is negatively geared, you’re not receiving passive income; rather, you’re spending additional income to maintain ownership of the property.
Is negative gearing worth it?
You might find that negative gearing works for you if you have additional income, you can handle an additional mortgage, and you expect the property to grow in value. If your goal is to build a property portfolio and wealth, it might not be the right avenue for you to do so.
Ultimately, the choice of whether you choose negative versus positive gearing will come down to your goals and financial situation. If you’re unsure about whether to negatively gear your investment property, you should speak to a financial adviser.
Ready to buy or build your next investment property?
Check out your investment home loan finance options today with loans.com.au! Find loans with competitive rates, low fees, and useful loan features tailored to meet your investment needs. Get in touch with us today by calling 13 10 90 or apply online today.
Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek independent professional advice tailored to your personal circumstances before making any financial decisions.
Find out in under 2 minutes if you qualify for one of our home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
