Negative gearing means your investment property costs more to hold each year than it earns in rent, but the difference is tax-deductible against your other income. Two recent rate rises have moved most South East investment properties into more meaningful negative gearing, so understanding the implications is crucial.
How does the tax benefit work?
If your property is negatively geared by $10,000 annually and you are in the 37 percent tax bracket, your actual out-of-pocket cost is approximately $6,300 per year after the tax deduction. This means the tax benefit offsets a significant portion of the shortfall, but it doesn’t eliminate it.
What’s the long-term investment case?
The investment case for negatively geared properties rests on capital growth over time outweighing that annual shortfall. You need to be confident you can service the holding cost through the current rate cycle without financial stress, as growth isn’t guaranteed.
The honest reality
You need to be confident you can service the holding cost through the current rate cycle without financial stress. Two recent rate rises have moved most South East investment properties from mildly to more meaningfully negatively geared. Don’t assume past cash flow figures will hold true – current rates are the key factor.
Questions to consider
- What is your personal tax bracket, and how much of the shortfall will it realistically offset?
- What level of capital growth is required to make this investment worthwhile, given the ongoing cash flow deficit?
- Have you stress-tested your ability to meet mortgage repayments if interest rates rise further?
Talk to KR Peters for a straight-talking appraisal with no obligation.
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Market information is general in nature and reflects conditions
at the time of publication. For advice specific to your property,
contact KR Peters.