Negative gearing explained

Negative gearing is a popular investment strategy in Australia, but it’s also a term that often pops up in the media, particularly around election time.

If you’re considering buying an investment property in Wollongong, the Illawarra, or beyond, it’s worth understanding how negative gearing and capital gains tax (CGT) work and how they could affect your long-term property strategy.

What is negative gearing?

Negative gearing occurs when the expenses associated with owning an investment property (such as home loan interest, property management fees, insurance, and maintenance) are greater than the rental income the property generates.

For example, if your investment property earns $2,800 a month in rent but costs $3,200 a month to hold, you’re negatively geared.

The benefit? Investors can deduct these losses against other income, such as wages or salary, which reduces their taxable income.

• Positive gearing happens when rental income exceeds costs.

• Neutral gearing is when income and expenses are roughly equal.

Why do investors choose negative gearing?

In Australia, it’s estimated that two out of three rental properties make a loss. So why would an investor choose this strategy?

The main reason is capital growth. Many investors are willing to accept short-term losses in the hope that the property’s value will rise significantly over time, allowing them to make a profit when they sell.

Another drawcard is the ability to reduce taxable income, a benefit that can be particularly appealing for those in higher income brackets.

What is capital gains tax (CGT)?

Capital gains tax is the tax you pay on the profit from selling a property. While it’s referred to as a separate tax, CGT is part of your overall income tax.

If you’ve held the property for more than 12 months, you may be eligible for the 50% CGT discount, which halves the taxable capital gain.

Why does negative gearing make headlines?

Negative gearing and CGT have long been debated in Australia’s housing policy. Critics argue they fuel property demand and favour higher income earners, while supporters see them as legitimate investment tools.

Different political parties have proposed reforms over the years from reducing the CGT discount to restricting negative gearing. While changes aren’t on the current government’s agenda, it’s an issue that frequently resurfaces around election time.

What this means for property investors

If you’re planning to purchase an investment property in Wollongong, the Illawarra, or interstate, it’s important to:

• Understand how negative gearing could impact your overall financial position.

• Seek advice from your accountant or tax adviser before making a decision.

• Explore finance options that support your long-term investment strategy.

Ready to explore your options?

Before making any property investment decisions, professional advice is essential. Once you’re ready, we can assist with the finance side comparing lenders, structuring your investment loan, and ensuring your loan features support your goals.

As your trusted mortgage broker Wollongong, we’ll guide you through the process and give you clarity at every step.

Get in touch today to explore your investment loan options.