Step-by-step guide to negative gearing for Willoughby investment properties, including cashflow examples, tax benefits, and break-even analysis.
Negative gearing occurs when investment property expenses (loan interest, fees, maintenance) exceed rental income, creating a tax-deductible loss. This loss reduces your taxable income, resulting in a tax refund. It's a legal strategy used by 1.3 million Australian investors. In Willoughby, negative gearing is common in early ownership years due to high property prices ($1.95M median) relative to rents ($1,200/week houses).
Purchase price: $850K, deposit: $170K (20%), loan: $680K at 6.5% interest-only. Annual income: $33,800 ($650/week). Annual expenses: interest $44,200, strata $6,500, council $1,800, management $2,340, insurance $800, maintenance $1,500, depreciation $8,500. Total: $65,640. Loss: $31,840. Tax refund (45% bracket): $14,328. Out-of-pocket: $17,512 ($337/week).
| Income/Expense | Annual Amount | Monthly Amount |
|---|---|---|
| Rental Income | +$33,800 | +$2,817 |
| Loan Interest | -$44,200 | -$3,683 |
| Strata Fees | -$6,500 | -$542 |
| Council Rates | -$1,800 | -$150 |
| Management Fee | -$2,340 | -$195 |
| Insurance | -$800 | -$67 |
| Maintenance | -$1,500 | -$125 |
| Depreciation | -$8,500 | -$708 |
| Pre-Tax Loss | -$31,840 | -$2,653 |
| Tax Refund (45%) | +$14,328 | +$1,194 |
| Out-of-Pocket Cost | -$17,512 | -$1,459 |
Purchase price: $1.95M, deposit: $390K (20%), loan: $1.56M at 6.5% interest-only. Annual income: $62,400 ($1,200/week). Annual expenses: interest $101,400, council $2,200, management $4,368, insurance $1,200, maintenance $3,500, depreciation $4,000. Total: $116,668. Loss: $54,268. Tax refund (45% bracket): $24,421. Out-of-pocket: $29,847 ($574/week).
High-income earners in 37-45% tax brackets gain maximum benefit (tax refund covers 37-45% of losses). Professionals earning $180K+ (finance, consulting, medicine) typical Willoughby investor profile. Lower-income earners (<$90K, 32.5% bracket) receive smaller refunds and may struggle with cashflow. Negative gearing works best with: secure high income, 5-10 year hold horizon, and cash reserves for unexpected costs.
Negative gearing is temporary - properties turn positive cashflow through: rental growth (4-5% annually), loan principal reduction (switch to P&I after 5 years), interest rate decreases (each 1% cut saves $6,800/year on $680K loan), and expense reduction (pay off loan faster, reduce insurance). A $850K unit typically breaks even year 5-6, then generates $5K-$8K annual positive cashflow years 7-10.
Negative gearing risks: job loss/income reduction reduces tax benefits, interest rate increases (7.5% rate adds $6,800 annual cost), vacancy periods (each month vacant = $2,600 lost income), major repairs (hot water system $2,500, stove $1,800), and policy changes (Labor's 2019 proposal to limit negative gearing). Maintain 3-6 month expense buffer ($13K for unit, $30K for house).
Get instant answers to common questions about home loans, grants, and the buying process.
Negative gearing occurs when investment property expenses (loan interest, rates, management fees) exceed rental income, creating a tax-deductible loss. For example, a $1.95M Willoughby house generates $62,400 rental income but $116,668 in expenses, producing a $54,268 loss. In the 45% tax bracket, this generates a $24,421 tax refund, reducing out-of-pocket costs to $29,847 annually ($574/week).
Yes, for high-income earners. Willoughby's strong capital growth (5.8% annually = $113K/year on $1.95M property) significantly outweighs negative cashflow. After $24K tax refund, net holding cost is $30K/year. Combined returns exceed 7.5% p.a. (capital growth + rental income - costs + tax benefits). Break-even typically occurs year 4-6.
Properties transition to positive cashflow in years 4-6 as rents increase 4% annually while loan principal reduces. A house rented at $1,200/week in 2025 reaches $1,450/week by year 6, while interest costs decline from $101,400 to $95,000 (principal paydown). After year 7-8, properties generate positive cashflow of $200-$400/week.
High-income professionals earning $180K+ in the 37-45% tax brackets benefit most, receiving $16,650-$24,421 annual tax refunds. Secure employment (finance, consulting, medicine) is essential. You need: 20%+ deposit, 3-6 month cash buffer ($13K-$30K), 5-10 year hold horizon, and ability to service $29K-$54K annual losses post-tax refund.
Key risks include: job loss reducing tax benefits, interest rate increases (1% rise = $15,600 extra cost), extended vacancy periods ($5,200 per month lost), major unexpected repairs ($2,500-$5,000), and potential government policy changes. Mitigate risks by: maintaining 6-month expense buffer, stress-testing at 7.5% interest rates, using quality property managers, and avoiding over-leveraging.
Speak with our investment property specialists to discuss your Willoughby investment strategy, financing options, and market opportunities.
Book a Complimentary Consultation