Negative Gearing Property - How negative gearing works who is it suited too
Over the past decade or so, investing in property has become all the rage in Australia, especially in the larger property markets of Sydney, Melbourne, Brisbane and the Gold Coast. Many budding investors have been attracted by the huge gains that have been achieved thanks to the Australia-wide property boom. Another attractive reason is that of the tax benefits of negative gearing. But is negative gearing into property really a good investment strategy?
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What is negative gearing?
Many people will have heard the term negative gearing but not everyone will fully understand what it means and its implications. Basically, negative gearing occurs where the costs of renting out an investment property outweigh the rental returns that are received from the rental of the investment property. When this loss occurs, the Australian Taxation Office (ATO) allows investors to offset this loss against their income tax assessment. Therefore, negative gearing on rental property is more a tax strategy than an investment strategy.
The benefit of negative gearing a rental property
Negative gearing a rental property provides obvious tax advantages because the overall costs of the property, once the rental returns have been taken into account, can be used to reduce the investor's income tax assessment. The cost of the loan (ie interest on mortgage repayments and stamp duty etc) is taken into account when calculating whether the investment is running at a loss.
Some of the other costs of running a rental property that can be used to negative a rental property include body corporate fees, building depreciation, cleaning costs, council rates, insurance costs, land tax, repairs and maintenance and water bills.
Take a look at our home loan resources page for a negative gearing calculator.
Is negative gearing the right strategy for property investors?
While negative gearing can help property investors reduce their taxable income in the short to medium term, it should not be considered the main reason for investing in any property. The purpose of investing after all, is to receive a positive cash flow and to make a profit. Over the longer term at least, you should be aiming to make a profit from your rental returns rather than a loss. By making a loss in order to negative gear your investment property, you may be relying too much on making a huge profit when it comes time to sell your property at some point in the future.