Negative Gearing

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“A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.

The overall taxation result of a negatively geared property is that a net rental loss arises. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income (such as salary, wages or business income) when you complete your tax return for the relevant income year. Where the other income is not sufficient to absorb the loss it is carried forward to the next tax year.

If by negatively gearing a rental property, the rental expenses you claim in your tax return would result in a tax refund, you may reduce your rate of withholding to better match your year-end tax liability.” (Source: Rental Properties 2013-14 – Australian Taxation Office)

Negative gearing can also allow you to profit through capital gains, where the value of your property increases greater than the expenses.

The risks

The valuation of your property may fall or loan costs may increase that aren’t covered by your potential tax deductions.

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