Negative gearing. For many Australians, the phrase conjures up images of high-flying property moguls and complex tax wizardry best left to the experts.
But what if we told you that this much-misunderstood strategy could be the key to unlocking tens of thousands of dollars in annual benefits—even if you’re not a millionaire?
If you’re earning a decent income and not using negative gearing, you could be missing out on a powerful way to reduce your tax bill and build real wealth, all while the Australian Taxation Office (ATO) quietly chips in.
At its core, negative gearing is surprisingly simple. It happens when the costs of owning an investment property—mortgage interest, strata fees, maintenance, and other expenses—outweigh your rental income.
In other words, your investment is running at a loss. But here’s the kicker: you can claim that loss as a tax deduction against your other income, such as your salary or business earnings.
Let’s put this into perspective with a real-world example: Suppose you own a $750,000 investment property.
Each year, you fork out $50,000 in mortgage interest and other expenses but only bring in $30,000 in rent. That’s a $20,000 net loss.
If you’re on the top marginal tax rate of 47 per cent, that loss translates into a $9,400 tax refund.
That’s nearly half your out-of-pocket cost returned to you, simply for owning a property that’s (hopefully) appreciating.
The long game
You might be thinking, ‘Why would I want to lose money every year?’ The answer lies in the long-term growth of Australian property.
Historically, property values have increased by an average of 6.3 per cent annually. So, your $750,000 property could grow by around $47,250 annually.
Let’s do the maths: you’re out of pocket $10,600 yearly (after your tax refund), but your property is increasing by $47,250. That’s a net benefit of $36,650 per year.
Essentially, you’re trading short-term cash flow for long-term capital growth, with the tax office helping to foot the bill.
Why negative gearing matters more than ever
Australia’s property market has been on a tear, with median values rising 38.4 per cent over the past five years. That’s an extra $227,000 added to the average property.
If you’re saving for a deposit, every month you wait, the goalposts move further away—property values are rising by about $3,775 a month.
Negative gearing can make it more affordable to hold an investment property, boosting your borrowing power. This means you can get into the market sooner, rather than watching from the sidelines as prices climb ever higher.
Before you rush out to buy an investment property, you must understand that negative gearing isn’t for everyone. Here’s what you’ll need:
- Spare cash to cover the shortfall between your property’s income and expenses.
- A deposit (or access to equity, perhaps via a family guarantee).
- Patience—ideally, you’ll want to hold the property for at least 7-10 years to ride out the property cycle and maximise your gains.
And, of course, you’ll need to choose your property wisely. Not all properties are created equal; if your investment isn’t growing in value, you could end up worse off.
Do your research, seek professional advice, and make sure you’re comfortable with the risks.
The cost of waiting
Many people think waiting to buy gives them more time to save, but in today’s market, delay can be costly. If that $750,000 property grows at the long-term average, it’s worth $797,250 after one year.
You’ll need to borrow more, save a bigger deposit, and possibly pay higher lenders’ mortgage insurance. Plus, you’ll miss out on the $9,400 tax refund from negative gearing. All up, waiting a year could cost you over $75,000.
Have you used negative gearing to get ahead? Are you considering it, or do you have concerns about the risks? We’d love to hear your experiences and thoughts in the comments below. Let’s get the conversation started!
Disclaimer: This article is general and does not constitute financial advice. Please consider your circumstances and seek professional advice before making investment decisions.
Also read: ATO alert: How to keep your $1,537 safe from tax scammers
