If you’re looking to invest in property, it’s important to understand what negative gearing is and all of the benefits, risks and tax considerations that come with it. Negative gearing isn’t a phrase you’d find within tax legislation, but gearing is an important aspect of any investment.
What is gearing?
When you borrow money to invest, you are gearing. This practice typically refers to borrowing money to use for investment properties. Income earned from your investment property will be positively, negatively or neutrally geared.
How can you tell how your investment is geared?
Positive gearing and its tax considerations
A property is positively geared when the rental return (e.g. rent) is higher than the interest rate on repayments and other property-related expenses.
The main benefits of positive gearing include:
- More guaranteed loan repayments
- Additional income
The income you receive from a positively geared property can help you repay your loan more confidently while allowing you to set aside money to spend on other things. It’s important to note that income from a positively geared property will be subject to income tax.
Negative gearing and its tax considerations
A property is negatively geared when the rental return (e.g. rent) is less than the interest rate on repayments and other property-related expenses.
The main benefits of negative gearing include:
- Capital growth
- Tax savings
The key benefit to a negatively geared property is that any net rental loss you incur during that financial year may be offset against your other income (salary etc.). This offset reduces your taxable income – both personal and investment income, reducing the rate of tax you pay.
Risks associated with negative gearing
While making a loss on an investment property seems counterintuitive, it’s a practice that has been widely used with the expectation that the capital gain when selling the asset will offset that loss.
As risky as it may sound, incorporating negative gearing on investment properties as part of your long-term investment strategy creates a channel for property growth and tax savings. This strategy provides immediate tax benefits while allowing you to purchase and finance more investment properties – growing your property portfolio faster.
There are many risks associated with negative gearing, so ensure you have a strong strategy for your properties and have consulted with a professional to support your efforts.
If you’re looking for more investment property information – check out the other parts of our ‘Tax Tips for Property Investors’ series or get in contact with us here for a personalised tax assessment or property portfolio review.