How to Calculate Negative Gearing Benefit

What is Negative Gearing?

Negative gearing occurs when the total expenses of an investment property exceed its rental income. The excess amount can be used to offset other income sources, reducing the investor's taxable income. This strategy is commonly used in countries with progressive tax systems, particularly in Australia, where it's a well-known tax strategy.

The negative gearing benefit is calculated by determining the amount by which expenses exceed income. This excess can then be used to reduce taxable income from other sources, potentially lowering the investor's overall tax bill.

How to Calculate Negative Gearing Benefit

Calculating the negative gearing benefit involves determining the excess of property expenses over rental income. Here's a step-by-step guide:

1. Calculate the total rental income from the property.
2. Calculate all property expenses, including mortgage interest, council rates, insurance, maintenance, and other costs.
3. Subtract the total rental income from the total expenses to find the negative gearing amount.
4. Apply this amount to offset other taxable income.
5. Calculate the resulting tax savings.

Use the calculator on the right to perform these calculations quickly and accurately.

The Formula

The negative gearing benefit is calculated using the following formula:

Where:

• Total Property Expenses includes mortgage interest, council rates, insurance, maintenance, and other costs.
• Rental Income is the total income from renting the property.

The resulting negative gearing amount can be used to offset other taxable income, reducing the investor's taxable income and potentially lowering their tax bill.

Worked Example

Let's look at a practical example to illustrate how to calculate negative gearing benefit.

Example Scenario

Consider a property with the following details:

• Rental income: $2,000 per month
• Mortgage interest: $1,200 per month
• Council rates: $300 per month
• Insurance: $150 per month
• Maintenance: $200 per month

Calculation Steps

1. Calculate total rental income: $2,000 per month.
2. Calculate total property expenses:
   • Mortgage interest: $1,200
   • Council rates: $300
   • Insurance: $150
   • Maintenance: $200
   • Total expenses: $1,200 + $300 + $150 + $200 = $1,850 per month
3. Calculate negative gearing benefit:
   Negative Gearing Benefit = $1,850 - $2,000 = -$150 per month

   The negative sign indicates that the property is not negatively geared in this scenario. However, if the rental income were lower, the property would be negatively geared.

In this example, the property is not negatively geared because the expenses ($1,850) are less than the rental income ($2,000). To achieve negative gearing, the total expenses would need to exceed the rental income.

Tax Implications

The negative gearing benefit can significantly reduce an investor's taxable income, potentially lowering their tax bill. However, it's important to consider the following tax implications:

• Capital Gains Tax (CGT): Negative gearing can affect the calculation of capital gains tax when selling the property.
• Income Tax: The negative gearing benefit reduces taxable income, which can lower the investor's income tax liability.
• Depreciation: Depreciation can also be claimed against rental income, further reducing taxable income.