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How negative gearing can help young professionals break into the Australian property market

Taxation
Published
14 Apr
2025
Authored by: Darrel Causbrook
Taxation
Published
14 Apr
2025
Authored by: Darrel Causbrook
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Negative gearing has become a common strategy for young professionals looking to break into the property market. By using negative gearing, property investors can offset some of the costs of owning a rental property against their taxable income when the property operates at a loss, making it easier to manage mortgage payments. This can be particularly beneficial for those with higher incomes and substantial tax liabilities.

The primary benefit of negative gearing is the ability to reduce your taxable income by claiming the losses incurred on a rental property. For young professionals, this means that while the rental income may not cover the mortgage in the short term, the tax deductions help ease the financial burden.

If you're considering using negative gearing as a way to enter the property market, it’s essential to understand the financial implications and how it fits with your tax situation. Schedule a complimentary consultation to explore how negative gearing could work for you.

How negative gearing can help young professionals break into the Australian property market

Taxation
Published
13 Sep
2024
Authored by:
Darrel Causbrook
Authored by:
Darrel Causbrook
Taxation
Published
14 Apr
2025
Authored by: Darrel Causbrook
Facebook IconInstagram IconLinkedin IconTwitter Icon
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Negative gearing has become a common strategy for young professionals looking to break into the property market. By using negative gearing, property investors can offset some of the costs of owning a rental property against their taxable income when the property operates at a loss, making it easier to manage mortgage payments. This can be particularly beneficial for those with higher incomes and substantial tax liabilities.

The primary benefit of negative gearing is the ability to reduce your taxable income by claiming the losses incurred on a rental property. For young professionals, this means that while the rental income may not cover the mortgage in the short term, the tax deductions help ease the financial burden.

If you're considering using negative gearing as a way to enter the property market, it’s essential to understand the financial implications and how it fits with your tax situation. Schedule a complimentary consultation to explore how negative gearing could work for you.

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Do you need a professional property tax accountant in Sydney? Schedule a complimentary consultation today.
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How does negative gearing work?

Negative gearing is a popular investment strategy for young professionals trying to get into the property market as it provides a way to access additional cashflow to help service a mortage on rental properties that initially make a loss.

Negatively gearing a rental property occurs when the costs of owning the investment, specifically the interest incurred on the mortgage, exceed the income generated by the asset, resulting in a net rental loss. The resulting loss can be offset against other income, such as the property investor's salary, to reduce their own taxable income.

In this way negative gearing encourages property investing in rental properties that don't produce an immediate profit in the short term due to the net rental income not being enough to cover the interest on the mortgage repayments.

Why do people invest in property that makes a loss?

It may seem counterintuitive that many Australians knowingly purchase investment properties that operate at a loss. There are two main reasons that investors make property investments in real estate when those assets aren't able to generate a profit in the short term:

Capital gain

Investors purchase negatively geared investment properties in the hope that they will realise a capital gain when they sell the property in the future, which is expected to more than make up for the loss.

Capital Gains Tax will likely be triggered in the event that the investment property is sold and needs to be factored into the profits the investor expects to make. There are ways people can legally reduce their Capital Gains Tax, mainly through the Principle Place of Residence. For more information, see our article How the "6-Year Rule" can reduce your Capital Gains Tax (CGT).

Positively geared property

Investors may also hold the property for long enough that it ceases to make a net rental loss on the rental income earned and becomes positively geared. For more on positive gearing, see below.

Positive gearing vs negative gearing

Positive gearing is the opposite of negative gearing. A positively geared asset occurs when the income generated from the investment, such as rental income from an investment property, exceeds the costs associated with owning and maintaining that investment. In this scenario, the investor not only covers their expenses incurred as a result of holding the asset, they also earn a profit, which can contribute to their overall income.

While positive gearing means you'll pay tax on the additional income generated by the investment property, it also provides a steady cash flow and reduces the reliance on capital growth to make the investment worthwhile. This strategy can be attractive for those seeking immediate returns rather than long-term capital gains.

What is needed for negatively gearing an investment property?

Adequate rental income and adequate personal income to cashflow the repayments

While negative gearing inherently involves making a loss, having sufficient rental income is still crucial. The rent should cover a significant portion of your rental expenses, such as mortgage repayments, maintenance, insurance, and property management fees. This helps ensure the property isn't a drain on your finances and maintains a manageable cash flow. Even though the property is negatively geared, having steady rental income minimises the financial strain and helps sustain the investment over time.

Remember, you only negatively gear the interest repayments, so you may still need to fund some of the loss out of your own personal income, which is why it's important you calculate how much you should expect the asset to generate in terms of rental income and how much you will need to personally cover if there's a remaining amount that can't be offset by negative gearing.

Tax liability

One of the primary benefits of negative gearing is the ability to offset the losses from your investment against your taxable income. To maximise this advantage, you need to have a sufficient tax liability—meaning you earn enough income from other sources, like your salary, to make the tax deductions worthwhile. The losses from the negatively geared property can then reduce your overall income tax payable, potentially leading to a lower tax bill.

Professional Advice

Negative gearing is a complex financial strategy that can have significant long-term implications. A good chartered accountant can help you understand the tax benefits, assess the potential risks, and ensure that you’re structuring your investment in a way that optimises your tax position. They can also help you navigate any changes in tax laws or regulations that might affect the viability of negative gearing.

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Case Study: How negative gearing helped Jack enter Sydney's property market

Jack, a 32-year-old marketing professional working in Sydney, had been contemplating entering the property market for a few years. Despite his steady income and diligent saving habits, Jack was concerned about the high property prices in Sydney. After researching various investment strategies, he decided to explore negative gearing as a means to get his foot in the door.

In 2022, Jack came across a one-bedroom apartment in a growing suburb on the outskirts of Sydney. The property was priced at $650,000, slightly above his initial budget, but its proximity to public transport and upcoming infrastructure developments made it an attractive investment prospect to him. The expected rental income was $450 per week, which was not enough to cover the mortgage and associated costs, meaning the property would be negatively geared.

Jack calculated that his monthly mortgage repayments, along with other expenses like property management fees, insurance, and maintenance, would total around $3,000. However, the rental income would only bring in about $1,950 per month, leaving him with a shortfall of $1,050 each month.

While the idea of losing money each month seemed daunting, Jack was aware that part of the loss could be offset against his taxable income. As a single professional with a gross annual salary of $120,000, Jack was in a high tax bracket, so the tax deductions offered by negative gearing were appealing given he had substantial tax he could tap into.

After consulting with his accountant, who explained how the tax benefits would work and helped Jack assess the long-term potential of the property, Jack decided to go ahead with the purchase. He locked in a fixed interest rate to manage his mortgage costs and budgeted carefully to ensure he could cover the monthly shortfall without impacting his lifestyle too significantly.

In the first year, Jack was able to claim the $12,600 annual loss from his negatively geared property against his taxable income, reducing his tax bill by a significant amount. This tax saving helped Jack manage the financial strain of the investment.

Over the next few years, as the suburb continued to develop, the value of Jack’s property began to increase. The rental market in the area also improved, allowing him to gradually raise the rent, reducing the shortfall between his income and expenses.

By 2027, the property had appreciated in value to $750,000, and Jack was able to refinance his loan at a lower interest rate. Although the property was still slightly negatively geared, the reduced shortfall and increased property value gave Jack the confidence to consider purchasing a second investment property.

Next Steps

If you're considering purchasing an investment property and need assistance calculating how much you can negatively gear using your tax liability, and how much of the shortfall you will have to cover out of your own cash flow, reach out to us today.

To learn more about the tax deductions available for investment properties, read our articles Understanding Australian investment property tax deductions: What every property investor should know, and Understanding Australia's Investment Property Tax: Benefits, Costs, and Key Considerations.

Sydney Tax Accountants for Property Investors

This category can cover various topics related to taxation, such as changes in tax laws, how to file taxes, common tax mistakes, and tax planning strategies.

At Causbrooks, our Sydney-based property tax accountants specialise in helping property investors navigate the complexities of property taxation. Whether you're a small business owner, property developer, or individual investor, we offer tailored tax advice and strategies to enhance your tax position, protect your assets, and optimise the cash flow from your investment properties. Our services cover everything from structuring your property investment portfolio to ensuring compliance with the ATO's tax laws.

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For more details on how we can assist with your property tax needs, visit our Property Tax Accountant page or schedule a consultation with our expert team today.

About Causbrooks

Causbrooks gives you a client manager supported by a team of knowledgeable accountants. We’re here to take the guesswork out of running your own business. Our accountants have much experience working with small business owners. Get in touch with us to set up a consultation or use the contact form on this page to inquire whether our services are right for you.

Disclaimer

Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.

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