Negative Gearing with a Rental Property

The concept of “negative gearing” essentially means that your property makes a tax loss from renting. As a result, the ATO may effectively pay for some of the rental costs due to an increase in your tax refund (or reduction in your tax liability).

Why would anyone want to be negatively geared?

There are two main reasons:

  1. Just because you’re negatively geared it does not necessarily mean you are losing money. To get the tax benefits of negative gearing, you need to be making a tax loss. It is possible to still be cash flow positive and be negatively geared. This is because some tax deductions are non-cash expenses. These can include deductions for the decline in value of the building, fixtures and fittings.
  2. It’s mostly about capital growth. Generally speaking, negative gearing can be financially successful so long as the rental property appreciates in value by more than the losses made on renting the property. The aim is for the increase in value of the property to exceed the losses. From a tax perspective, the losses are usually immediately deductible and your tax benefit is equal to your marginal tax rate. No tax is paid on the increase in value of the property (capital gain) until a disposal happens. Ordinarily, the tax rate on the capital gain is around half your marginal tax rate, thanks to the benefits of the CGT discount.

There are many factors to consider before taking action on a negative gearing strategy. If you would like assistance with rental projections and tax effective structuring, then please let us know.

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