Negative Gearing in Australia: How Property Investors Save on Tax

If you've spent any time researching the Australian property market, you have undoubtedly heard the term "negative gearing." It is a massive tax strategy used by over a million Australians to build wealth through real estate. But what exactly is it, and why is it so controversial?

What is Negative Gearing?

A property is "negatively geared" when the rental income you receive from your tenants is less than the cost of owning and managing the property (mortgage interest, council rates, maintenance, property management fees). In short, the property is running at a financial loss.

Why would anyone want an investment that loses money? The secret is the Australian tax system. The Australian Taxation Office (ATO) allows you to deduct that rental loss from your personal income. This means if you have a high-paying job, your investment property loss drastically reduces the amount of income tax you have to pay.

How the Strategy Makes You Rich

The goal of negative gearing is not to lose money forever. The strategy relies on Capital Growth. You accept a small, tax-subsidized cash loss every year, with the expectation that the value of the property is skyrocketing. When you eventually sell the house 10 years later for $500,000 more than you bought it for, that massive profit easily wipes out the yearly cash losses.

The Risks Involved

Negative gearing only works if the property goes up in value. If the property market crashes, or stays flat for a decade, you are simply bleeding cash every month with no payout at the end. You also must have enough personal cash flow from your day job to cover the shortfall on the mortgage every month.

If you are looking at investment properties, use our Mortgage Calculator to estimate your monthly interest costs so you can accurately forecast your negative gearing deductions.