Turn property losses into tax wins
If you’re exploring property investment in Australia, you’ve likely come across the term ‘negative gearing.’ But what does it actually mean for your finances?
It’s a popular strategy in Australia, but one that requires careful planning to get right. At its core, negative gearing happens when your rental income is less than your property expenses, and you offset the loss against your taxable income.
In this guide, you’ll learn how to calculate negative gearing, the expenses you can claim, and the mistakes to avoid so you can decide whether it’s the right move for your investment goals.
What is negative gearing?
Gearing in property investment simply means you borrow money to purchase an asset. Negative gearing happens when your investment property costs more to own than the property income it generates. The rental income you receive is not enough to cover all the rental expenses, such as loan interest, council rates, and maintenance costs.
This situation results in a net rental loss for the financial year. The reason an investor might choose a negatively geared property lies within the Australian tax system. You are allowed to offset losses against your other income.
Key points:
- Investors can often claim this net rental loss as a tax deduction against their other taxable income, like a salary.
- This deduction lowers your total taxable income, which can reduce the amount of tax you pay.
- It’s a strategy focused on future capital growth, hoping the property’s value increases over time to provide a substantial capital gain upon sale.
How to calculate negative gearing in 3 steps
Figuring out if a property is negatively geared is straightforward. You need to use a simple gearing calculation. It subtracts your total expenses from your total property income for the year.
The basic formula for calculating negative gearing is:
Total Rental Income – Total Deductible Expenses = Net Rental Profit or Loss.
If you get a negative number, the property is negatively geared.
Step 1: Determine your assessable rental income
First, you must calculate all the income the geared property generates. The main component is the gross annual rental income paid by your tenants. This is the full amount before any property management fees are taken out.
Other income sources could also apply to the rental income sum. This might include payments from tenants for ending a lease early or insurance payouts for lost rent. You must add all these amounts together to get your total annual rental for the full year.
Step 2: List all your deductible expenses
Next, you must add up every tax-deductible expense related to the rental property. This list of property expenses can be long and includes many costs associated with holding the asset. These are costs you paid for during the financial year the property was available for rent.
Being thorough here is important, as missing expenses will lead to an incorrect negative gearing calculation. You can use a negative gearing calculator or a gearing calculator tool to help track these figures. This ensures you account for all potential claims.
Step 3: See if you have a loss
Finally, subtract your total expenses from your total income. This reveals the property’s financial performance for the year. A negative result confirms a net rental loss, which means the asset is a negatively geared property.
Let’s look at a practical example. This makes the concept much easier to understand.
| Item | Amount (per year) |
|---|---|
| Gross rental income | $28,000 |
| Total deductible expenses: | |
| Investment loan interest payments | $25,000 |
| Council rates | $2,000 |
| Water rates | $1,000 |
| Body corporate fees | $3,000 |
| Insurance premiums | $1,500 |
| Repairs and maintenance | $2,500 |
| Property management fees | $2,240 |
| Depreciation | $4,000 |
| Total Expenses | $41,240 |
| Net Rental Profit/(Loss) | Gross rental income- total expenses $28,000-$41,240 -$13,240 |
In this scenario, the annual loss is $13,240. This property is clearly negatively geared. This is the figure you can potentially use to offset your other income.
Tracking all of this information correctly is critical. Getting these figures right will have a direct impact on your tax return. If you need help with your specific situation, you can get a fixed-price accounting quote for professional support.
How to Find a Property Accountant That Maximises Your Tax Returns
What expenses can be claimed under negative gearing?
Knowing which rental expenses are deductible is essential for an accurate calculation. The Australian Taxation Office (ATO) has clear guidelines on what you can claim. You can only claim expenses for the period your property was rented or available for rent.
Expenses can be broken down into different categories. Here are some of the most common deductible costs for a rental property.
1. Ongoing running costs
These are the expenses paid to keep the property operating, and you can typically claim them in the same year you pay them. These costs are a significant part of your negative gearing strategy. These fees, property management and council fees add up.
Common costs include:
- Advertising for tenants: Fees you pay to find new occupants for your property.
- Body corporate fees: Also known as strata fees, for managing common areas. These body corporate fees and property management fees can be substantial in apartment buildings.
- Council rates: The rates your local council charges you each year. The fees council rates cover local services.
- Land tax: An annual tax levied by state governments on the land you own.
- Water rates: This includes service charges but usually not water usage paid by the tenant.
- Property management fees: Costs for a real estate agent to manage the property and collect rent. This includes management fees for their services.
- Insurance premiums: The cost of landlord insurance and building insurance.
2. Maintenance and repairs
You can also deduct the costs of maintaining the property. This means work done to prevent or fix deterioration. It’s about keeping the property in its original state and not a capital improvement.
Examples of repairs include fixing a broken window or repairing a leaking tap. Pest control services and general maintenance costs also fall into this category. You should keep records that separate repairs from improvements, as their tax treatment differs.
3. Financial and legal costs
Most of the financial costs associated with the investment loan are deductible. This is often the largest expense for investors. These costs can include:
- Interest on the loan: The interest charged on the money you borrowed to buy the property is deductible. However, principal repayments of the loan repayment are not.
- Bank fees: Monthly or annual fees related to the investment loan account.
- Legal fees: The cost of creating or renewing a lease agreement. This does not include the legal fees for buying the property itself, which are a capital cost.
4. Depreciation and capital works
Some costs give benefits over several years. These expenses must be claimed over time. This includes depreciation on assets and deductions for capital works.
Depreciation refers to the decline in value of certain assets, like carpets, ovens, or air conditioners. A quantity surveyor can prepare a depreciation schedule to maximise your claims. These are part of your overall tax deduction.
Capital works are for the building’s construction costs. This can include renovations, extensions, or major structural improvements. These costs are generally deducted at a rate of 2.5% per year over 40 years from the date of construction.
Are there any tax benefits and implications under negative gearing?
Beyond just covering costs, negative gearing can open the door to valuable tax savings and cash flow benefits, only if you know how to use it strategically.
1. Reduce your taxable income
The biggest benefit of negative gearing is that it lets you offset your rental property loss against other income.
Example:
- Salary income: $120,000
- Net rental loss: $13,240
- New taxable income: $106,760
If your marginal tax rate is high, this could mean a substantial refund.
2. Improve cash flow with PAYG withholding variation
Instead of waiting until tax time to receive your refund, you can apply to the ATO for a PAYG withholding variation. If approved:
- Your employer withholds less tax from each paycheck.
- You receive the benefit of the deduction throughout the year, helping to cover any cash shortfall from the property.
3. Long-term strategy depends on capital growth
Negative gearing is usually a capital growth play, you’re betting the property’s value will rise enough to outweigh short-term losses.
If the market stagnates or falls, you may face a large overall loss and possibly capital gains tax when selling.
Negative gearing vs. Positive gearing: What’s the difference?
Investors should also understand the opposite of negative gearing, which is positive gearing. A property can also be neutrally geared. The best strategy for you depends on your financial goals and risk tolerance.
Positive gearing happens when your rental income is greater than your expenses. The property generates a net profit. This provides you with extra cash flow each month.
However, you must pay income tax on this profit as it gets added to your taxable income. The choice between strategies often comes down to cash flow needs versus tax planning. You can see a simple comparison below.
Feature | Negative gearing | Positive gearing |
|---|---|---|
Financial outcome | Expenses are greater than income, creating a loss. | Income is greater than expenses, creating a profit. |
Cash flow | Negative, meaning it costs you money to hold. | Positive, providing extra income each month. |
Tax impact | Creates a tax-deductible loss to reduce other income. | Creates a taxable profit that increases your tax bill. |
Primary goal | Capital growth over the long term. | Immediate rental income and positive cash flow. |
There is also neutral gearing. This occurs when income and expenses are roughly equal. The property pays for itself but doesn’t create a significant profit or loss.
Property Accounting and Financial Management for SMEs
5 mistakes to avoid when calculating negative gearing
When you’re working through how to calculate negative gearing, mistakes can be costly. They can lead to issues with the ATO or missed financial opportunities. Here are some frequent errors to watch out for.
1. Mixing up repairs and improvements
A big mistake is incorrectly classifying your spending. The ATO sees repairs and improvements very differently. A repair restores something to its original condition.
An improvement makes something better than it was before.
For example,
- Replacing a broken fence panel is a repair and is immediately deductible.
- Replacing the entire old fence with a new, more modern one is a capital improvement, which must be depreciated over many years.
2. Not apportioning expenses correctly
You can only claim expenses for the portion of the property and time it was used to earn income. If you live in a duplex and rent out the other half, you can only claim 50% of shared costs. The same applies if you use your holiday home for personal getaways.
- You must accurately divide costs like loan interest and council rates.
- Strict rules also apply to travel expenses; you generally cannot claim travel to inspect a residential rental property unless you are in the business of property investing.
- Claiming private or personal expenses, such as interest on your family home loan or car loans for personal use, is not permitted.
You must separate these costs from your genuine investment expenses.
3. Misunderstanding capital costs
Many initial costs of buying a property are not immediately deductible against your rental income. Expenses like stamp duty, conveyancing, and legal fees associated with the purchase are capital costs. These items form part of the property’s cost base.
- The cost base is used to calculate your capital gains tax when you eventually sell the property.
- Confusing these with day-to-day rental expenses is a common error.
- This can lead to incorrectly claiming a tax deduction now instead of reducing your future capital gains.
4. Poor record keeping
Solid record keeping is not optional. The ATO requires you to keep detailed records for all income and expenses for at least five years. This includes receipts, bank statements, and agent summaries.
Without proper proof, your claims can be denied if you are audited. Using spreadsheets or accounting software can make this process much easier. It prevents stress at tax time and protects you if the ATO has questions about the claims you’re making.
5. Ignoring your cash flow position
Focusing only on the tax benefits is a trap. You must have enough money to cover the property’s losses each month. Running out of cash could force you to sell at a bad time, potentially losing money on your investment.
Before you invest, you need a clear budget. Understand how much you’ll need to contribute every week or month. This helps make sure the investment is sustainable for the long term.
Conclusion
Negative gearing is a well-known investment approach in Australia. It allows a property investor to offset a property’s net loss against their other taxable income. The main goal is to benefit from tax reductions now while aiming for capital gain in the future.
Now you know how to calculate negative gearing by subtracting your total expenses from your annual rental income. The success of this strategy is not guaranteed. It depends on strong property market growth to offset the short-term cash flow losses and generate a profit.
Understanding the formula, claimable expenses, and maintaining perfect records are essential parts of the process. Properly managing your approach to how to calculate negative gearing can make a real difference in your property investment journey.
How Sleek can help you maximize your negative gearing benefits
Negative gearing can be a powerful strategy but only if your numbers are accurate and your tax claims are watertight. That’s where Sleek’s property accountants comes in.
- Precise record-keeping: Track every deductible expense so you never miss a claim.
- ATO-ready reporting: Get compliant, accurate statements for tax time without the stress.
- Cash flow planning: Forecast and manage shortfalls so your investment remains sustainable.
- Expert property tax advice: Sleek’s dedicated accountants specialise in local investment property tax rules, ensuring you make the most of available benefits.
Book a free consultation today and let Sleek’s experts turn property losses into strategic tax wins.
FAQs on how to calculate negative gearing
Yes. Many investors integrate negative gearing with strategies like depreciation schedules (to boost non-cash deductions) and trust structures (for income distribution flexibility). Some also use a PAYG withholding variation to improve cash flow during the year rather than waiting for a tax refund. However, combining strategies increases complexity and ATO scrutiny, so accurate record-keeping and professional advice are essential.
While negative gearing can lower your taxable income, lenders assess your serviceability differently. Many banks will “shade” rental income (only counting 70–80% of it) while including the full amount of your expenses. This means a negatively geared property could reduce your borrowing power, even if it lowers your tax bill. If you plan to build a portfolio, you need to balance tax benefits with your capacity to finance future purchases.
An increase in interest rates can magnify your net rental loss, making the property more expensive to hold. This could erode your cash flow buffer and force you to contribute more from your personal income. If you rely heavily on the tax offset to cover shortfalls, rising rates may push the investment beyond your comfort zone. Many seasoned investors run sensitivity analyses to forecast their position if rates climb by 1–2% before committing to the strategy.
incorporation, accounting, tax
services, and compliance.
450,000
businesses worldwide.
from 4,100+ reviews.
satisfaction rate from
16,000 surveyed clients.
450,000
businesses worldwide.
from 4,100+ reviews.
satisfaction rate from
16,000 surveyed clients.
