NEGATIVE GEARING EXPLAINED

Gearing simply means borrowing money to invest in an income producing asset like property.

The investment returns on a property can either be negatively geared or positively geared.

Property is positively geared when an investor borrows money to invest and the rental income is higher than the deductible expenses, as a result generating an income.

Property is negatively geared when an investor borrows money to invest and the rental income is lower than the deductible expenses, as a result generating loss.  The loss generated can be offset against the taxable salary or wages.

Tax deductible expenses

The expenses that you can claim for tax deduction includes interest on loan, strata levies, council rates, water rates, property management fees, maintenance etc. 

For more details you can refer to  Rental property expenses.

Some expenses can be claimed in the same income year and some expenses such as depreciation on property, lenders mortgage insurance etc. can be claimed over a number of income years.

Cash Expense vs. On Paper Expense

Expenses such as council rates, maintenance, insurance etc. are considered as actual costs that need to be paid for.

On the other hand, depreciation is the expense you don’t really pay for. It is simply an expense on paper, which is still tax deductible. It is also known as non-cash deductible expense.

What is Tax Depreciation

Tax depreciation is a tax deduction that can be claimed for the natural wear and tear of an income-producing building and its assets over time. It is generally the second biggest tax deduction for property investors, after mortgage interest.

Brand new properties are fully loaded with tax depreciation benefits and it is one of the keys to boosting cashflow for your investment properties. 

Benefits of Negative Gearing

Loss generated from negatively geared property can be offset against other income earned such as salary, wages or business income. As a result, your taxable income and tax payable reduces.

Negatively geared properties are generally associated with higher capital growth potential. Over the long run, investors are able to leverage the tax money and reap long term capital growth benefits.

Risks associated with Negative Gearing

In case of interest rates increase, higher vacancy periods, job loss etc., if proper provisions are not made to manage the cashflow, it can be challenging to hold on to negatively geared property.

Investors having low taxable income but highly negatively geared property may not be able to take full advantage of negative gearing benefits.  Negatively geared properties can impact the future borrowing capacity.

Why does Negative Gearing exist

Negative gearing is an incentive offered by the government to encourage investors to enter the property market.

When an investor buys property it fuels the supply that helps to service the demand.

With increased supply the rents stay lower and makes housing affordable for wider community.

Myth: Negatively geared property cannot have positive cashflow

Fact is that the properties that are negatively geared pre-tax, can generate positive cashflow post-tax benefits.

The current market is well positioned to achieve this outcome, with historical low interest rates, investors are best placed to find positive cashflow properties and still use negative gearing benefits while achieving long-term capital growth.

Key Takeaways

As with all investments, you must have a plan and a strategy.

Negative Gearing works best with brand new or recently renovated properties to fully utilise the non-cash deduction provisions i.e. depreciation.

Property in general is a long-term investment, and negatively geared properties held for short term can result in a wasteful effort.  But if property is held for long-term it can generate significant growth for the investor.

Team SONI can help

At SONI, your growth is our commitment. We have a system in place to identify your situation, your needs and aspirations, your concerns and your risk appetite. 

We take time to educate you on property investments and implement a tailor-made investment strategy to build wealth through property. 

Whether you are looking to buy your first home, your first investment property or to build on to your existing portfolio, be rest assured our team of experts have extensive experience and are committed to making things happen for you.

Book your 60-minute no-obligation Wealth Consultation NOW via this link https://lnkd.in/ezYrnFi

“SUCCESSFUL INVESTING IS ABOUT MANAGING RISK, NOT AVOIDING IT” - BENJAMIN GRAHAM