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Fast facts about negative gearing
What is negative gearing?
Gearing is when investors borrow money to purchase an investment. When investors buy a loss-making investment, it’s called negative gearing.
Fast facts about negative gearing
What is negative gearing?
Gearing is when investors borrow money to purchase an investment. When investors buy a loss-making investment, it’s called negative gearing.
What is a negatively geared property investment?
Gearing may be used to buy any investment asset, but it is more commonly employed by property investors.
A negatively geared investment property means that the sum of expenses (including loan interest and principal payments) is higher than the rent income generated.
Investors need to use their own income to pay for the remainder of expenses.
Benefits of negative gearing
The Australian Taxation Office (ATO) allows negatively geared investors to offset the loss against their tax payable.
This tax offset and the hope that the asset will increase in value enough to recover losses when liquidated is what negative gearers are after.
Negative gearing and regulations
Because many property investors use the negative gearing strategy to minimise their tax payable, there have been several propositions to reform its regulations and impose tighter restrictions.
As at 1 July 2017, ATO enforced tighter restrictions on:
- Depreciation deductions claims for plant and equipment items in residential and rental real estate
- Offsets for travel expenses incurred for any transaction relating to the property
Despite this, the Australian Labor Party (ALP) proposed even tighter restrictions on negative gearing in the lead up to the 2019 elections.
Proposed changes to negative gearing
The government has kept an eye on negative gearers to ensure that the tax privileges they are given are not taken advantage of. In fact, the Opposition has been vocal about enforcing tighter restrictions should the party win elections.
ALP’s most recent attempt to tighten negative gearing rules were proposed in the run up to the May 2019 elections:
- Negative gearing strategy may only be applied to newly constructed properties
- Only negatively geared properties purchased before 1 January 2020 will be fully grandfathered
ALP’s election loss halted further restrictions on this strategy, but it may not be the last time restrictions will be proposed or enforced.
If you’re a rookie property investor who wants to use the negative gearing strategy, it’s highly recommended to seek the advice of a licensed professional before securing a property.
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