When buying investment properties, people are often looking to turn a profit. This is why negative gearing is usually perceived as a black mark on your investment portfolio. But is the stigma deserved? We speak with Alex Jacques, Principal at Choice Home Loans Oxley, to investigate how negative gearing might be used as part of your investment-property buying strategy.
What is gearing?
Firstly, ‘gearing’ simply means borrowing money to invest in property or business.
An investment property is considered ‘positively geared’ when its annual rental income covers, or exceeds, the mortgage interest payments. This includes any associated expenses such as rates, levies, management fees and maintenance costs. In other words, the property is making a profit.
When the interest, fees and other costs on the investment property exceed the rental income from that property, the investment is considered ‘negatively geared’ – meaning the property isn't making a profit.
The positives of negative gearing
The upside of a negatively geared property currently is the net loss from your investment property can be offset against other income. For example, if a property generates $26,000 income per year but costs $30,000 per year, under current rules the investor can claim an income loss of $4,000 against their taxable income, thereby reducing the overall amount of tax they pay.
Some investors make a strategic decision to buy a negatively geared property as a way of reducing their taxable income. This might allow them to build savings or pay down debt on their owner-occupied home.
“Negative gearing is a way to minimise the short-term downside of owning a loss-making property as an investment," Alex Jacques says. "It’s not usually a long-term strategy, as investors need to realise profits sooner or later, whether through higher rentalreturns or capital growth on resale.”
Others might purchase a property with the intention of making money from day one, but due to cyclical market conditions or fluctuating rental demand, find themselves negatively geared with short-term tax benefits.
According to Alex, negative gearing may assistpeople with borrowing money for investment opportunities that would otherwise have been beyond their financial reach.
“Currently, if the loss exceeds the income (which can happen in any new investment or business), negative gearing can soften the impact," Alex says.
If you're considering buying an investment property, Alex recommends that you first consult a tax advisor and a mortgage broker. This will help you understand the impact negative gearing can have on your long-term financial strategy and the amounts you may be able to borrow to purchase an investment property.
Just remember that if your investment property is negatively geared, it means you are not making money on the property. You may need to look to selling the property at a good profit to make money on your investment.
This article is written to provide a summary and general overview of the subject matter covered for your information only. Every effort has been made to ensure the information in the articles is current, accurate and reliable. This article has been prepared without taking into account your objectives, personal circumstances, financial situation or needs. You should consider whether it is appropriate for your circumstances. You should seek your own independent legal, financial and taxation advice before acting or relying on any of the content contained in the articles and review any relevant Product Disclosure Statement (PDS), Terms and Conditions (T&C) or Financial Services Guide (FSG).