Negative Gearing & Capital Gains Tax: What Every Property Investor Should Know

If you're thinking about buying an investment property, you've probably heard the terms Negative Gearing and Capital Gains Tax (CGT). They can sound complicated - but once you understand the basics, they're much easier to get your head around.

While tax can play an important role in property investing, it shouldn't be the only reason you buy an investment property. Understanding how these rules work can help you have more informed conversations with your accountant or financial adviser.

What is Negative Gearing?

Negative gearing happens when the deductible expenses of owning your investment property are greater than the income it earns.

These expenses may include things like:

• Interest charged on your investment loan

• Council rates

• Insurance

• Property management fees

• Repairs and maintenance

• Other eligible expenses associated with owning the property

  
  

When your eligible expenses are more than your rental income, your property is considered negatively geared.

Subject to Australian tax law and your individual circumstances, you may be able to claim that net rental loss as a deduction against your assessable income.

It's important to remember that negative gearing doesn't mean you're making money. It means you're making a loss on the property and the tax deduction may help reduce the after-tax cost of holding that investment.

Does Negative Gearing mean it's a bad investment?

Not at all.

Many investors accept a short-term cash flow loss because they're focused on the property's long-term potential.

Their goal is often to build wealth through capital growth over time, while rental income and possible tax deductions help support the investment along the way.

Of course, property values and rental returns can go up or down and past performance doesn't guarantee future results.

What is Capital Gains Tax?

Capital Gains Tax (CGT) is part of Australia's income tax system.

If you sell an investment property for more than its cost base, you may make a capital gain. That gain may be subject to Capital Gains Tax and needs to be included in your tax return.

Your cost base isn't simply the purchase price. It can also include certain eligible costs associated with buying, owning and selling the property, so the final taxable gain may differ from the difference between the purchase and sale prices.

Is there a Capital Gains Tax discount?

In many cases, yes.

Individuals and trusts who own an investment property for at least 12 months before entering into the contract to sell may be eligible for the 50% CGT discount, provided they meet the eligibility requirements.

This doesn't mean you pay half the tax.

Instead, 50% of the capital gain may be disregarded before the remaining gain is included in your assessable income. The amount of tax ultimately payable depends on your personal tax circumstances.

Companies are generally not eligible for the 50% CGT discount.

Should tax benefits be the reason you invest?

We don't believe so.

While tax benefits may form part of an overall investment strategy, they shouldn't be the main reason you purchase a property.

A strong investment starts with choosing the right property in the right location, understanding your budget and having a strategy that aligns with your long-term financial goals. Any tax benefits should be considered alongside other important factors - not as the sole reason to invest.

How can we help?

Whether you're purchasing your first investment property or expanding your portfolio, we're here to help you explore quality house and land opportunities across South East Queensland.

We'll work alongside your broker, solicitor and accountant to help you make informed property decisions, while keeping the buying process as straightforward as possible.

If you're ready to explore your investment options, we'd love to help.

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Disclaimer: This article contains general information only and is not financial, legal or taxation advice. Australian taxation laws are complex and may change over time. Whether negative gearing or Capital Gains Tax applies to you depends on your individual circumstances. You should seek advice from a qualified accountant or registered tax adviser before making any investment decisions.