Can you negatively gear an empty house?

By Michael Mata | 25 Nov 2016
New property developments are rapidly taking shape in many parts of Australia, particularly in New South Wales and Victoria. As a result, the country now has more than 2 million landlords. However, despite the boom, thousands of dwellings remain uninhabited, even in high-growth markets like Sydney.

In taxation statistics from the Australian Taxation Office (ATO), the amount of net rental loss claims have decreased from the 2011-2012 to 2013-2014 financial years, while net rental incomes have increased.

Despite these gains, many foreign investors who’ve bought property in Australia reap more benefits by leaving them empty, states property tax specialist Shukri Barbara.

“If you don't have a need for cash, and all you're doing is sinking your funds into an asset, then in the current economic environment in Australia, particularly in Sydney and Melbourne, the markets are thriving and the values are thriving because of low interest rates,” Barbara said.
“Given the large number of developments, it's not surprising that, especially overseas people, leave them empty. If you don't need the can leave it empty.”

Are the owners of vacant property getting tax benefits?

That depends.

Negative gearing a property is possible if the owners’ rental expenses exceed their rental income. These expenses could come from items like loan interest, maintenance costs, strata fees, insurance, as well as rates and taxes.

People who negatively gear their properties expect the house value to appreciate. By taking a loss now, they expect the house to end up selling for more than what they bought it for. However, if a house is left empty by choice and there is no rental income coming in, then the owner is unable to get tax deductions from the government.

If owners try to claim rental losses when no revenue is coming in, Barbara warns that ATO will place them on their watch list. “[ATO] will start putting in the query to do an audit,” he said. “They'll look at whether it's a genuine investment purchase. [Hence] you have to demonstrate…that it is being put out for business.”

What happens if the owners cannot find tenants?

According to Barbara, if the property stood empty when the owner had it listed with a real estate agent in search of a tenant, then all the expenses would be allowed for a tax deduction.

He cited how some of his clients in northern Queensland were unable to find renters for their older properties because a massive new development next door was attracting the tenants. Though the property remained vacant, the owners were still able to negatively gear that property.

“The concept is that you are in the business to make a profit out of rental,” he said.

Related stories:
Negative Gearing 101: How Would You Cope If It Were Nixed?
Tax Tips On Running Investment Portfolios


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