Negative Gearing is a popular term in property investment in the Australian market. Yet many people are unsure about what negative gearing actually is.
It is important to take the word negative out of it and focus on the ‘gearing’.
This information is of a general nature only and is not considered tax advice. For advice specific to your situation, we recommend you speak to an Accountant or Tax Advisor.
Gearing is borrowing money to invest or leveraging your existing cash or equity. And then using that to borrow more than what you currently have to invest in other assets. It is not limited to residential property and can apply to other investments. Examples include commercial property, businesses, shares and managed funds.
Negative gearing occurs when the costs of borrowing are higher than the income generated. Costs can include maintenance, depreciation and the running of that asset. With a residential property, you would be receiving income in the form of rent from your tenants.
To sum it up, negative gearing involves you losing money. But you have the ability to claim a tax deduction for your losses. This may reduce the tax paid on other forms of income.
No one plans to make a loss forever. The end goal is to have your property making money for you. This may be in a lump sum when you sell the investment.
You can potentially claim back some of your losses against your other taxable income.
Properties that are negatively geared are easy to find.
Any property can be negatively geared. All you need to do is charge less rent than what you’re paying out (obviously this is not always a smart strategy).
If you held property through a period of high growth, there is the potential for a large windfall gain.
You need to make sure that you have the income to cover the shortfall of what you are losing. You will also need to have enough to cover the interest repayments if your property is vacant for a period of time. Or you have issues collecting the rent from your tenants.
Is property that you hold old or does it have maintenance issues? You could be up for expensive maintenance costs beyond what you had budgeted.
Some of these risks can be mitigated by being careful with your property selection. Newer properties may have greater tax deductions than older properties. Ensure you discuss this with your tax adviser before purchasing.
As well as the property, pick your target area wisely. Ensure your chosen suburb is likely to have high rental demand both now and in the future. This may mean avoiding towns that are reliant on single industries such as mining towns.
If you are considering investing in property. It is important to ensure that your loans are set up in the right way.
Doing so protects your tax deductions and ensures you are able to grow your portfolio in the future.
Are you are looking at property investment and need a home loan? Please get in touch with us about our obligation free mortgage broker service.