Negative Gearing: What Is It and Why You Should Know About It

Negative gearing is a term often tossed around in property investment circles, but what does it actually mean? Understanding this concept is crucial if you’re considering adding property to your investment portfolio. Let’s break down what is negative gearing and why many Australian property investors opt to use this financial strategy. We’ve written this guide with the basics to start you on your informed property investment journey. Read on to learn what is negative gearing and how it works.

How Does Negative Gearing Work?

How does negative gearing work? The loss you incur from your investment property can offset your taxable income from other sources, such as your salary. This reduces the amount of tax you pay. While you’re out of pocket in the short term, and you must cover the property expenses during the year, the hope is that the property’s value will increase over time. This potential capital gain can then be used to offset the losses incurred through negative gearing.

Why You Should Know About Negative Gearing

Having negative gearing explained in a way you understand is crucial for making informed investment decisions. It’s a complex strategy with potential benefits and drawbacks. That’s why seeking professional advice from a mortgage broker like Professional Lending Solutions is essential. We can help you assess your financial situation, investment goals, and risk tolerance to determine if negative gearing is right for you.

Negative gearing is just one piece of the property investment puzzle. It’s important to consider other factors like property location, rental yields and potential capital growth when making your investment decisions.

Negative Gearing Explained: A Real-World Example

Let’s look at a hypothetical example of negative gearing.

Scenario

• You purchase a property for $500,000.
• You borrow $400,000 with interest-only repayments of $24,000 per year.
• You rent the property for a rental income of $20,000 per year.
• Other expenses (rates, body corporate, property management, repairs) total $8,000 per year.

Calculations

• Rental income: $20,000
• Expenses:
  • Interest: $24,000
  • Other expenses: $8,000
  • Total expenses: $32,000
• Negative gearing loss: $32,000 – $20,000 = $12,000

In this example, you have a loss of $12,000 on the property. However, this loss can be claimed as a tax deduction, reducing your taxable income by $12,000. If your marginal tax rate is 32%, this equates to a tax saving of $3,840.

Important Notes

• This is a simplified example and doesn’t account for all potential costs or income.
• Tax laws and rates can change.
• Negative gearing is a long-term strategy and property values need to increase to offset the ongoing losses.

Would you like to learn more about the potential benefits and risks of negative gearing? Or perhaps you’re interested in exploring other property investment strategies? Contact Professional Lending Solutions for a chat about your needs and financial goals today.