Negative Gearing Strategy Explained
Negative gearing reduces your tax liability when rental expenses exceed rental income. Learn when this strategy makes financial sense.
What is Negative Gearing?
Negative gearing occurs when your rental property expenses (interest, maintenance, rates, etc.) exceed your rental income, creating a tax-deductible loss.
This loss offsets your other taxable income (salary, business income), reducing your overall tax liability.
How Negative Gearing Works
Step 1: Calculate rental income
- Annual rent received from tenants
Step 2: Calculate rental expenses
- Loan interest (typically the largest expense)
- Mint Property Mate or Property management fees
- Council rates and land tax
- Insurance premiums
- Repairs and maintenance
- Depreciation
- Other deductible costs
Step 3: Calculate the loss
If expenses exceed income, the difference is your negative gearing loss.
If income exceeds expenses then you'll pay tax on the net revenue (difference).
Step 4: Split between owners (if applicable)
If two people own the property the loss has to be split 50/50.
Step 5: Offset against other income
The loss reduces your taxable income from other sources, lowering your tax bill.
Mint's Fresh Take
Negative gearing only makes sense if you expect capital growth to exceed your after-tax losses. Otherwise, you're losing money each year hoping for future gains. Keep in mind that you need to have the cash on hand to use on the expenses that the rent doesn't cover.
The Risks of Negative Gearing
- Cash flow pressure: You must personally fund the shortfall between rent and expenses every month.
- Interest rate risk: Rising interest rates increase your losses and cash flow burden.
- Market risk: If property values don't grow as expected, you've sustained losses without offsetting capital gains.
- Income changes: If your employment income drops, you may not have enough taxable income to offset losses against.
Calculating Your Tax Savings
Tax savings = Rental loss × Marginal tax rate
- Rental income: $25,000
- Rental expenses: $32,000
- Loss: $7,000
- Marginal tax rate: 37%
- Tax saving: $7,000 × 37% = $2,590
- Net out-of-pocket cost: $7,000 - $2,590 = $4,410 per year
You're still $4,410 out of pocket annually – negative gearing doesn't eliminate the loss, it just reduces it.
Mint's Fresh Take
Want help esimtaing how much tax you could save with a rental property? Use Mint's Negative Gearing Tax Savings Calculator to estimate your tax refund based on your income, rental income, and property expenses. Input your loan value, interest rate, and annual costs – the calculator does the rest using current ATO tax rates.
Mint's Takeaway
- Negative gearing allows rental losses to offset other taxable income, reducing your tax bill.
- Tax savings = Loss × Marginal tax rate (e.g., 37% or 45% for high earners).
- Most effective for high-income earners in high marginal tax brackets.
- Only makes financial sense if expected capital growth exceeds after-tax losses.
- Requires stable cash flow to subsidize the property's shortfall.
- Vulnerable to interest rate increases and market downturns.
Mint automatically calculates your rental income, expenses, and tax position – helping you understand if negative gearing benefits your financial situation.