There are many options available to investors and being aware of all your choices permits you to choose the best financial strategy for your situation. Answering. “What is negative gearing?”, can help you take advantage of an important and commonly used practice in property investing. Fully understanding negative gearing means knowing what the term means, when and why investors choose to use it, and how it impacts your taxes and finances. Oak Tree Finances endeavours to provide accurate information to help you make informed choices, but please remember to always consult a professional before making any financial decisions.

What does negative gearing mean for your investment portfolio? Oak Tree Finances provides investment loan advice to help answer such questions. Contact us on 0404 403 066 now!

What is Negative Gearing?

Gearing is the practice of borrowing money to purchase any type of asset. Negative gearing occurs when income from an investment is less than expenses, resulting in a loss. It is commonly used in the property market because Australian tax law permits investment property losses to be deducted from an investor’s taxable income.

What does negative gearing mean for my portfolio?

Frequently, investors realise rental income from such properties won’t turn a profit immediately, but they keep it on their portfolio anyway. The goal is to sell the property in the future and benefit from its long-term growth. Also the rental income will normally increase over time so whilst the property may be negatively geared when you buy it, over time it may become postively geared. There is risk of course, as there are no guarantees that a property will increase in value, but research and planning can mitigate some of the exposure. For this reason investors aim to buy property types and location which they expect will increase in value over time.

In many cases the strategy is not to buy properties which are negatively geared it is to buy quality properties which will go up on value over time. The issue is that these properties can often be negatively geared if you don’t have a large deposit but understanding negative gearing allows you to reduce your tax and make it more affordable to purchase these properties. If everything goes according to plan you can end up with good capital growth and eventually over time the property will become positively geared as rents increase over a number of years.

Understanding Negative Gearing – Tax Implications

The primary benefit of negative gearing stems from offsetting rental losses against any other income you earn thus lowering the amount of tax you are required to pay. For example, if you make $30,000 from a rental property but the costs come to $40,000 then you can lower your amount of taxable income. In this example by $10,000. Costs can include interest payments on mortgages, property management fees, maintenance costs, and depreciation.

Depreciation is an important concept to understanding negative gearing and the loss it creates. Depreciation is a decrease in the value of a building and the assets within it, including items like carpets, floors, and appliances. Taking full advantage of the value depreciation provides can help maximise the deductions you are eligible for and keep more money in your pocket. Depreciation is an important deduction because it is a deduction you get each year even though you have not actually spent anything.