Debt Recycling, Negative Gearing and CGT




Debt Recycling in the Australian Property Market: Pros and Cons

Debt recycling is a financial strategy that has gained traction among Australian property investors. It involves converting non-deductible debt, such as a home loan, into tax-deductible investment debt. This process can potentially accelerate wealth creation and provide tax benefits. However, like any financial strategy, it comes with its own set of advantages and disadvantages.

How Debt Recycling Works

Debt recycling typically involves using the equity in your home to invest in income-producing assets. Here’s a simplified breakdown of the process:

1. Pay Down Your Home Loan: Use your savings to reduce your non-deductible home loan.
2. Redraw or Reborrow: Borrow the same amount you paid off and invest it in income-producing assets like shares or investment properties.
3. Tax Deduction: The interest on the new loan is tax-deductible because it’s used for investment purposes.
4. Repeat: Continue this cycle to gradually convert your non-deductible debt into deductible debt.

Pros of Debt Recycling

1. Tax Benefits: By converting non-deductible debt into deductible debt, you can reduce your taxable income, potentially lowering your tax bill.
2. Accelerated Wealth Creation: Investing borrowed funds in income-producing assets can potentially generate higher returns, accelerating your wealth accumulation.
3. Pay Off Home Loan Faster: The income generated from investments can be used to pay down your home loan more quickly.

Cons of Debt Recycling

1. Market Risk: Investments can be volatile. If the market performs poorly, you could end up with significant losses.
2. Increased Debt: This strategy involves taking on more debt, which can be risky if not managed properly.
3. Complexity: Debt recycling requires careful planning and management. It’s not a set-and-forget strategy and may require professional advice.

Benefits of Negative Gearing

Negative gearing is another popular strategy among Australian property investors. It occurs when the costs of owning an investment property exceed the income it generates, creating a net loss. This loss can be deducted from your taxable income, reducing your overall tax liability.

Advantages of Negative Gearing

1. Tax Deductions: The primary benefit of negative gearing is the ability to offset property losses against other income, reducing your taxable income.
2. Potential for Capital Gains: Over time, the property may appreciate in value, providing significant capital gains when sold.
3. Encourages Investment: Negative gearing can make property investment more attractive, potentially leading to increased housing supply.

Considerations of Capital Gains Tax (CGT)

When selling an investment property, capital gains tax (CGT) is a crucial consideration. CGT is calculated on the profit made from the sale of the property, which is the difference between the sale price and the property’s cost base (purchase price plus associated costs).

Key Points on CGT

1. CGT Discount: If you’ve held the property for more than 12 months, you may be eligible for a 50% discount on the capital gain.
2. Main Residence Exemption: Your primary residence is generally exempt from CGT. However, if you’ve rented it out at any point, partial exemptions may apply.
3. Record Keeping: Maintaining detailed records of all expenses related to the property is essential for accurately calculating CGT.


Debt recycling and negative gearing are powerful strategies that can offer significant financial benefits to Australian property investors. However, they also come with risks and complexities that require careful consideration and management. Understanding the implications of capital gains tax is also crucial when planning your investment strategy. Always consider seeking professional financial advice to tailor these strategies to your individual circumstances. At NewStart Financial Solutions we have access to a large variety of professional services who can provide the right advice for you.


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