How can negative gearing work for you?

When it comes to your bank account, the word negative doesn’t exactly fill you with joy. But when it comes to investing, it can take on a whole new meaning.

Negative gearing is a popular investment strategy in Australia. Put simply, it’s when you purchase a property for investment reasons and you spend more money on expenses than you make in rental income – essentially, you’re making a loss.

Now, none of us invest to make a loss; obviously, it’s to make a profit and put our fancy Monopoly skills to good use. However, you can benefit from this loss by offsetting it against the income you earn from your job. This effectively lowers your income so you’ll have less tax to pay at the end of the financial year.

Singin’ in the claim.

When you find out what you can claim as a property investor, you’ll definitely be singing (but maybe not in the rain).

1. Interest.

You can claim the interest charged on your loan that you used to purchase the property, purchase land to build the property, make repairs to the property and finance renovations on the rental property.

2. Repairs and maintenance.

Had a leaky roof? Pipes need replacing? Or perhaps the front fence needed a fresh lick of paint? You can deduct the cost of these repairs from your annual income.

3. Travel.

Whenever you travel to your investment property for an inspection, you’re entitled to claim the cost of petrol or your transport ticket. And if you travel overnight to visit your rental property, you can deduct your airfare, accommodation and meals.

4. Management fees.

Investing in a property manager can take the stress out of renting. They’ll advertise your property, screen the applicants, collect the rent and bond, organise tradespeople for repairs, and manage any disputes. And if you decide to use an agent, you can claim the cost of their services.

5. Body corp fees and rates.

If your property is part of a block, you’ll be expected to pay body corporate fees. These fees are used to look after common areas, like shared gardens, stairways and lifts, and repairs to external parts of the building.

You’re also responsible to pay council rates, water rates and land taxes – but as a property investor, these fees are immediately deductible.

6. Depreciation.

Over time, assets, technology and white goods lose their value. And when it comes to tax time, you can claim depreciation – a reduction in the value of these items.

Having a depreciation schedule drawn up by a professional quantity surveyor will help you make the most of depreciation claims while sticking to the rules.

Let the gains begin.

Negative gearing is also a positive strategy when property values are set to increase – this is called capital growth. Because you’ve been making a loss, when you do sell, you’re more likely to make a big (and hopefully) fat profit.

Investment tip:

If you don’t have a disposable income, negative gearing probably isn’t the best investment strategy. You’ll need access to funds to cover the mortgage balance (i.e. mortgage repayment minus rental income), repairs, maintenance and property management, otherwise you could end up in serious financial trouble.

While negative gearing works for some Australians, it’s not for everyone. Chatting to a financial advisor can help you decide the best investment strategy for you.