Negative gearing has been available in Australia for much of the last century, but only widely used by property investors since the 1980s. It enables investors to deduct property expenses from their taxable income where they add up to more than is earned from rent.
Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).
The key benefit of negative gearing is that any net rental loss you incur during the financial year may be offset against other income you earn, such as your salary. This reduces your taxable income and how much tax you have to pay.
Put simply, a positively geared property (also known as a 'cash flow property') is an investment that generates more in rental income than it costs in loan repayments, strata fees and other expenses associated with ownership.
How to Reduce Taxable Income
- Contribute significant amounts to retirement savings plans.
- Participate in employer sponsored savings accounts for child care and healthcare.
- Pay attention to tax credits like the child tax credit and the retirement savings contributions credit.
- Tax-loss harvest investments.
Positive gearing is generally seen as lower risk than negative gearing, as it provides more predictable returns and consistent income. The surplus income may cushion investors from any interest rate hikes, increased home loan repayments and unexpected property (or life) costs.
Investors can claim the interest charged on a loan for an investment property and any bank fees for servicing that loan. For example, if you incur $20,000 interest on your loan and $200 in loan fees, you can claim these on your personal tax return.
No, there are no circumstances where you can deduct rent payments on your tax return. Rent is the amount of money you pay for the use of property that is not your own. Deducting rent on taxes is not permitted by the IRS.
Is stamp duty tax deductible? No – but it is included as a cost of buying the property, so it can help to reduce any capital gains tax payable if you sell the place for a profit.
Taxpayers can deduct the interest paid on first and second mortgages up to $1,000,000 in mortgage debt (the limit is $500,000 if married and filing separately). Any interest paid on first or second mortgages over this amount is not tax deductible. Annual effective interest rate, after taxes are taken into account.
Some examples of allowable expenses are:
- General maintenance and repair costs.
- Water rates, council tax and gas and electricity bills (if paid by you as the landlord)
- Insurance (landlords' policies for buildings, contents, etc)
- Cost of services, e.g. cleaners, gardeners, ground rent.
- Agency and property management fees.
How does negative gearing work? Negative gearing occurs when the cost of owning a rental property outweighs the income it generates each year. This creates a taxable loss, which can normally be offset against other income including your wage or salary, to provide tax savings.
However, broadly speaking, conveyancing fees (and other expenses like stamp duty) charged on the transfer of the property cannot be claimed as deductions. Keep in mind that legal expenses incurred during the management of your property are entirely different, and may be tax deductible immediately.
An investor who is negative gearing expects to gain from tax benefits in the short term and to eventually sell the asset at a higher price to make up for the initial losses. Negative gearing only becomes a profitable venture when the property is eventually sold.
