Understanding Negative Gearing

While you may not yet have any investment properties, chances are you have heard the term Negative Gearing. But what exactly is negative gearing and why is it so important?

In the simplest terms, negative gearing occurs when the costs associated with a property outweigh the income it generates.

On first glance, this definition makes negative gearing property seem to be, well…negative.

Consider this scenario, you have just purchased a new residential property in one of the most desirable areas, and as a bonus, you have managed to secure a comprehensive loan to cover it. However, the mortgage, combined with council rates, insurance rates, maintenance costs, depreciation and other associated property costs are somehow far exceeding any income you are making through the measly rent.

In the above scenario because of the losses you make against the investment property you would actually be lowering your tax liability on your income. The loss will be offset by tax deductions and consequently, any losses you just made through negative property gearing would be substantially reduced and perhaps even considered as a sizeable saving.

In a nutshell, by making a loss on your property through negative property gearing you can qualify for tax benefits that could result in a substantial savings.

Negative property gearing is held in high regard by most seasoned investors in both property and the stock market, as it enables the investor to consider investment opportunities that may otherwise be out of their league. It is generally accepted that capital gain and wealth creation benefits of negative property gearing more than make up for the any short term deficits in income.

The Catch With Negative Gearing

There is a catch with negative property gearing. For it to work you need to be able to afford the loss. You need to be flexible with your finances and ultimately fund the losses while the investment is growing. This growth can take a while, and not everyone can afford to carry the losses required. So we strongly advise you to consult with your financial advisor before you consider implementing a negative gearing strategy.

Contact the team at greatinvestmentproperties.com.au with any questions you have around negative gearing or for general residential property investment advice.