Negative gearing in Australia occurs when the costs of owning an investment property exceed the rental income it generates. The resulting loss — the difference between income and expenses — can be deducted from the investor’s other assessable income, reducing their overall tax liability.
Eligible costs. Tax-deductible costs on a negatively geared investment property include mortgage interest, council rates, land tax, property management fees, landlord insurance, repairs and maintenance, depreciation on the building (Division 43) and plant and equipment (Division 40), and accounting fees relating to the investment.
Who benefits most. Investors in higher tax brackets benefit most from negative gearing because their marginal tax rate determines the value of the deduction. An investor in the 47% bracket saves 47 cents in tax for every dollar of deductible loss. An investor in the 19% bracket saves only 19 cents.
The capital growth assumption. Negative gearing is a strategy that accepts an ongoing cash loss in exchange for anticipated capital growth. The investor profits when the property is eventually sold and the capital gain exceeds the cumulative losses and acquisition costs.
Risks. If property values do not increase sufficiently, or if interest rates rise materially, a negatively geared investment may generate losses that outweigh the tax benefit. Negative gearing is not suitable for investors who cannot comfortably service the cash shortfall without financial stress.
ATO position. The Australian Taxation Office fully recognises negative gearing as a legal investment structure.
