What’s Happening with Negative Gearing?

Negative gearing is making headlines once again, but what exactly is it, and how could it affect you? Let’s dive into how negative gearing works, why it remains a popular strategy among investors, and why it's once again sparking conversation.

Australians have a long-standing love affair with property, with more than one in ten adults (2,268,161 Australians) owning at least one investment property.

Why Is Property Such a Popular Investment?

There are several reasons why property investments are so appealing. First and foremost, landlords can collect a steady stream of rental income, which helps cover the costs of the property, including the mortgage.

Additionally, property values in Australia have been on a long-term upward trend. Over the past century, national property prices have increased by an average of 10.9% per year, according to AMP Insights.

This means that investors not only benefit from rental income but also stand to gain when they eventually sell, with the possibility of a 50% discount on capital gains tax (CGT) on their profits.

But perhaps the most compelling reason for many investors is the tax savings associated with negative gearing.

How Does Negative Gearing Work?

In simple terms, ‘gearing’ refers to borrowing money to invest. Negative gearing occurs when the costs of owning a property, such as loan interest, council rates, and insurance, outweigh the income generated by the property.

As a result, the investor records a loss, which they can then claim on their tax return, reducing their taxable income. This is beneficial because it can lower their overall tax liability, even though the property’s value may be appreciating at the same time.

The tax advantage comes from being able to offset that loss against other sources of income, such as a regular salary or wage, potentially leading to significant tax savings.

An Example of Negative Gearing in Action

Let’s look at a hypothetical scenario:

Deb earns an annual salary of $125,000. Based on 2024-2025 tax rates, she would pay $28,288 in tax and the Medicare levy.

Deb has recently purchased an investment property, which generates $25,000 in rent annually. However, the costs associated with the property, including loan interest and landlord insurance, amount to $35,000 each year, leaving her with a $10,000 loss.

Deb can claim this loss on her tax return, reducing her taxable income to $115,000. As a result, her tax and Medicare levy are reduced to $25,288, saving her $3,000 in taxes.

That $3,000 can be applied towards repaying the investment loan, highlighting the practical advantage of negative gearing.

The Controversy Surrounding Negative Gearing

One point of contention with negative gearing is that many investors, while claiming losses on paper, are seeing their properties increase in value year after year. Critics argue that these investors aren’t truly experiencing a financial loss when property appreciation is considered.

On the other hand, supporters argue that capital gains on property are already taxed (albeit often with a 50% discount), so investors aren’t escaping taxation entirely.

Why Is Negative Gearing in the News Again?

Recently, negative gearing has sparked fresh debate after Federal Treasurer Jim Chalmers mentioned he had asked for Treasury modelling on its impact on housing supply.

While Prime Minister Anthony Albanese stated, "We have no plans to touch or change negative gearing", political landscapes are never set in stone.

Given that there are over 2.2 million property investors in Australia—about half of whom negatively gear their properties—it would take a bold government to make significant changes to the policy.

Thinking About Investing in Property?

Before diving into property investment, it’s wise to consult a tax professional to determine whether negative gearing could benefit your financial strategy. While it's a popular tool, it's not necessarily the right fit for everyone.

If you're eager to start your property investment journey and want to explore the best finance options available, reach out to Osinski Finance. We can help you understand your borrowing capacity and offer expert insights on how to leverage the equity in your current property to make your investment dreams a reality. 

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.