Tax rule that could make you $36,650 every year: 'Missing out'

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21 hours ago

When most people hear 'negative gearing' it's common for them to switch off or think it's only for the super-rich. But this one strategy can make the difference between staying stuck and building serious wealth — not just because of the tax savings, but also because it can be the key to getting into the property market in the first place.
With property prices rising, and these price increases accelerating way faster than inflation, getting into the property market, or getting ahead with property investing is getting harder by the day. But the longer you wait, the further behind you actually fall.
If you're making a decent income and you're not using negative gearing today, you're essentially missing out on one of the smartest ways to reduce your tax and turn the ATO into your silent investing partner.
In this piece, I cover what negative gearing is, how it works, and why it matters today more than ever.
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Negative gearing is something that happens almost magically when the cost of owning an investment property (i.e. the loan interest and property expenses) is higher than the rental income you receive. In this case, your investment is essentially running at a loss — but the kicker is that you can claim that cost as a full tax deduction against your other taxable income (for example your employment salary).
Let me lay this out with an example.
You own an investment property worth $750,000 that costs you $50,000 each year in mortgage interest, strata, maintenance, etc, but you earn $30,000 annually in rental income. The difference is a $20,000 net loss, which you then use to reduce your taxable income.
On the top marginal tax rate of 47 per cent, this $20,000 loss results in a $9,400 tax refund. That's pretty much half of the cost back just for owning a property that's going up in value anyway.
And while it might seem a little scary to be running your investment at a loss, the income of your investment is only one part of the equation — the other is growth. Based on the long term Australian property growth rate of 6.3 per cent, your $750,000 property would be increasing in value on average by around $47,250 each year.
The maths is solid on this one, you're paying $10,600 each year to get a gain of $47,250, meaning the net benefit to you is $36,650 each year. In this case, what you're really doing is swapping short term cashflow for long term growth — with the ATO footing part of the bill.
The tax benefits of negative gearing are substantial, but there's an even bigger benefit from putting this into place — and it's getting you into the property market or securing your next property sooner.
Australia's property market is increasing at an increasing pace, where over the last five years the median property value has increased by 38.4 per cent, adding over $227,000 to the value of the average property. This means that property values are effectively increasing by $3,775 every single month, making it hard to keep up — let alone get in front.
If you're trying to save for a property deposit, you're losing ground with every month that goes past — and if you're waiting for interest rates to drop further, or the property market to 'settle down', you might be waiting forever.
Negative gearing can help you get into the property market sooner, because it makes holding a property more affordable, which in turn increases your ability to borrow from the bank. And as you can see from the example in the previous section, once you get this strategy in place, the net benefit to you is in the tens of thousands each year.
This strategy definitely isn't something for everyone, but where there's a fit it can work very effectively. For this to fit for you, you'll need to have enough spare cash to fund the cashflow cost of holding the property. You'll also need some funds for your deposit, or equity you can use through a family guarantee type loan. The final piece is that you need the ability to hold your property investment for 7-10 years or more, to give your investment time to benefit from a full property market cycle.
If you go down this path, it almost goes without saying — but just to say it, choosing a quality property that will be a good long term investment is critical, as is managing your borrowing risk. If you're covering a cashflow burn in the short term, you need to make sure you're benefiting from the value growth on the other side. If you're not, you're just paying money to hold an asset that's not growing, which is a bit of a financial disaster. It's important you do your research and get some good advice before you jump into the property.
Most people think that waiting to buy property gives you more time to save, but in Australia's property market today that delay can be seriously costly.
If a $750,000 property grows at the 6.3 per cent long term average, after one year it's increased by $47,250 to $797,250. That means you'll then need to borrow an extra $11,250, save an extra $7,500 for your deposit, and potentially even fund a higher LMI premium.
And on top, you miss out on the $9,400 in tax refunds from negative gearing. That means the total extra cost of waiting a year is over $75,000, and you often only realise after it's too late.
Negative gearing isn't about just trying to dodge tax, it's about using the rules to your advantage and playing the long game, smarter. Even if you're earning good money, it can be hard to keep up — let alone get ahead, unless you know how to make your money work for you.
Negative gearing allows you to get into the property market sooner, cut your tax bill, build your investment assets, and stay ahead of rising property prices. If you're sitting on the sidelines waiting for the right time, you should know that every year you wait could be costing you.
Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth. Ben's new book, Virgin Millionaire; the step-by-step guide to your first million and beyond is out now on Amazon | Audiobook.
If you want some help with your money and investing, you can book a call with Pivot Wealth here.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.Sign in to access your portfolio