How Negative Gearing Works

Gearing relates to borrowing to buy a property with only a small personal contribution and borrowing the larger % from others.

Property investors rent the property to make an income in the short term and a capital gain, long term.

A property investment is considered negatively geared when the rental income does not cover all the costs associated with owning the property

The Australian Tax Office allows property investors to reduce their taxable income by the amount of the shortfall.

What are the costs of ownership?

Annual Property Expenses
Amount Depreciation
(non cash)
Interest on loan 22500 Building 5000
Rates- land &water 2200 Fixtures 4000
Landlord Insurance 350
Contents Insurance 550
Property Management 2050
Pest Inspection 350
Maintenance 500
Body Corporate 2500
Miscellaneous 500
Total 31500 Total 9000

How is the tax rebate calculated?

Rental Income 23400
minus Property Expenses 31500
minus Depreciation 9000
Total tax deduction 17100
At 37% MRT + 2% Medicare 17100 x .39 =
Tax Rebate $6669
Pay by pay $128pw

How are my out of pocket costs calculated?

COST to own investment property 31500
minus rent 23400
minus tax rebates 6669
Owner’s contribution 1431
Weekly out of pocket cost $27.50pw

Who pays what %?

Tenant Pays 23400 (Rent)/31500 (Total costs)    74%
ATO Pays 6669 (Rebates)/31500 (Total costs) 21%
Owner Pays 1431 (out of pocket)/31500 (Total costs) 5%