If you're an apartment or strata owner in Australia or are considering becoming one, chances are you've heard the term "negative gearing" thrown around in the news or by fellow property owners. For many, this concept can sound complicated, but it doesn't have to be. Let’s break down what negative gearing is, how it works, and why it matters—especially in the context of apartment and strata ownership in Australia.
What is Negative Gearing?
In simple terms, negative gearing occurs when the costs of owning an investment property (like interest on loans, maintenance, and strata fees) exceed the income the property generates (like rent). The key benefit is that property investors can use these losses to reduce their taxable income, which in turn reduces their overall tax bill.
Here’s an example:
Let's say you own an apartment that earns you $20,000 a year in rental income. But the cost of holding the property—loan interest, maintenance, strata fees, etc.—adds up to $25,000 a year. That $5,000 shortfall is considered a loss, and you can use that loss to reduce your taxable income from other sources, such as your salary. If you're in a higher tax bracket, this can lead to a significant tax refund.
Negative Gearing and Apartments
If you own or are thinking of buying a strata property, negative gearing can be particularly relevant.
Strata fees—which are the costs paid by all owners in a building to maintain common areas like pools, gardens, and elevators—are one of the many deductible expenses that contribute to negative gearing. As apartment owners generally pay higher strata fees than standalone home owners would spend on individual property maintenance, they often experience larger deductions.
Why is Negative Gearing Important?
For many investors, negative gearing is a strategy to grow wealth by owning a property, despite initial losses. Here’s why it matters:
Tax Savings: As mentioned, negative gearing allows you to offset losses against your income, reducing your tax liability. This is particularly attractive for higher-income earners.
Long-term Capital Gains: Investors bank on the idea that, over time, property values will increase. While they may experience a cash loss in the short term (due to negative gearing), the hope is that the property will appreciate, leading to a profit when it’s eventually sold.
Affordability of High-Demand Properties: In cities like Sydney or Melbourne, where property prices are high, negative gearing enables investors to afford properties that might otherwise be out of reach by cushioning their losses with tax benefits.
The Role of Strata in Negative Gearing
For strata owners, it's important to understand that the strata levies you pay form part of the equation when calculating your investment’s profitability. Levies typically cover:
Maintenance of common areas
Utilities fees for common areas such as electricity and water
Capital Works Fund for major, future repairs
These levies add up to a significant cost but, thankfully, they’re deductible under negative gearing. Higher strata fees in well-maintained buildings can actually make negative gearing more beneficial because the larger deductions will further reduce your taxable income.
Negative Gearing: The Pros and Cons
It’s crucial to weigh the pros and cons of negative gearing, especially as an apartment or strata property owner-investor.
Pros:
Immediate tax benefits: You can claim tax deductions on your losses, which is attractive if you have a high income.
Potential for long-term capital gains: Over time, your property’s value might rise, offsetting initial cash losses.
Encourages property investment: Many investors use negative gearing to afford properties they hope will deliver high returns in the future.
Cons:
You're still losing money: Despite tax benefits, you're running a loss in real terms. If property prices don't rise as anticipated, you may struggle to make a profit.
Dependence on market growth: Negative gearing only works if the property increases in value over time. The Australian property market can be volatile, especially in major cities like Sydney or Melbourne.
Potential policy changes: Government policies on negative gearing can change. There has been ongoing debate in Australia about limiting or removing negative gearing benefits, especially with housing affordability in the spotlight.
The Future of Negative Gearing
Negative gearing has long been a hot political issue. Critics argue it inflates property prices and makes housing less affordable for first-home buyers. There have been calls to limit negative gearing to new properties only, or to phase it out entirely. So, if you’re relying on negative gearing, be aware that future policy changes could affect your tax benefits.
On the other hand, supporters of negative gearing argue that its main benefit lies in promoting investment in the housing market, which ultimately increases the supply of rental properties. These advocates believe that removing or limiting negative gearing could reduce the incentive for investors to enter the market, leading to a shortage of rental properties and driving up rental prices, further exacerbating the housing affordability crisis. Thus, they argue, negative gearing plays a crucial role in maintaining rental supply and stabilising the broader housing market.
Conclusion: Is Negative Gearing for You?
For strata investors, negative gearing can provide significant tax benefits—particularly in high-cost markets like Sydney. However, it’s important to remember that it involves running a loss in the short term, in the hopes of long-term capital gains.
If you’re considering negative gearing as an investment strategy, make sure you do your homework. Understand your expenses (including strata fees), calculate your likely rental income, and consult a financial advisor to see if it’s a strategy that fits with your financial goals.
Negative gearing isn't a get-rich-quick scheme, but for many Australians, it’s a valuable tool for building long-term wealth through property ownership. To truly maximise your investment, a well-maintained property is essential—and that’s where a professional strata manager like Compass Strata comes in. With expert management, proactive maintenance, and clear budgeting, they ensure your property remains in top condition, boosting its appeal and value. Don’t leave your investment to chance—partner with Compass Strata to safeguard and grow your property’s value for a more secure financial future.
