Negative gearing is a financial strategy commonly used in real estate investment. It involves borrowing money to purchase an investment property, such as a rental property, with the expectation that the rental income generated will be less than the expenses associated with owning and maintaining the property, resulting in a net loss.
Here’s how negative gearing typically works:
- Borrowing: An investor takes out a loan, typically a mortgage, to finance the purchase of an investment property.
- Rental Income: The investor rents out the property to tenants, generating rental income.
- Expenses: The investor incurs various expenses related to the property, including loan interest, property management fees, maintenance costs, property insurance, and council rates.
- Net Loss: If the total expenses exceed the rental income, the investor experiences a net loss on the property. This means the investor is making a financial loss each year.
- Tax Deductions: The investor can offset the net loss against their other taxable income, such as salary or business profits, reducing their overall taxable income. This results in a reduction in the amount of income tax the investor needs to pay.
- Capital Growth Potential: The investor may rely on the property’s potential for capital growth over time to offset the annual net loss. They may anticipate that the value of the property will increase, allowing them to sell the property at a profit in the future.
The aim of negative gearing is to take advantage of the tax benefits associated with the net loss incurred on the investment property. By reducing taxable income, investors can potentially reduce their overall tax liability while holding onto an asset they expect will appreciate in value over time.
It’s important to note that the viability and benefits of negative gearing can vary depending on factors such as local property market conditions, interest rates, rental demand, and individual financial circumstances. It is advisable to consult with a financial advisor or tax professional before making any investment decisions or implementing negative gearing strategies.