What you need to know about negative gearing

By the resi financial blog team, 17 October 2014

Negative gearing

Negative gearing is a popular strategy for investors seeking to build wealth through property.
 
When you are negatively geared, the expenses relating to the money you borrowed to buy your property are more than the income you receive from the asset – that is the rent. This means you are making a loss.
 
But there are a number of tax advantages that make this loss more bearable. Investors can write off expenses associated with their loan against their tax: specifically the interest paid on the loan, amounts paid for services and maintenance and depreciation.
 
While being negatively geared can reduce the amount of tax you pay, you need to remember that the overriding purpose behind borrowing to buy an investment is to build wealth: reducing your tax bill should not be the sole objective.
 
Therefore if you are negatively geared, you should be aiming for a future capital gain - that is one day when you decide to sell, the value of the property will be more than what you paid for it. Alternatively, you might be hoping to become neutrally or positively geared.
 
When you are positively geared, the income from the property covers the loan costs. When this happens you may find that you have to pay tax on the income so be aware of how this fits into your overall strategy.
 
Negative gearing has both supporters and opponents. Over the past year there’s been a lot of talk around abolishing the tax breaks. One of the arguments is that they lock out first-home buyers from the market through pushing up property prices.
 
While there’s been no word from the government as to whether it will make any changes to negative gearing, anyone considering investing in property might want to start making a decision sooner rather than later.
 

Categories: negative gearing