There are two main reasons people invest in a negatively geared property. Firstly, to save on tax, and secondly to generate an investment that will provide capital gain down the track.
If you borrow money to invest in a property, and the rental income from that property minus expenses is less than the interest payments on the borrowings, you are running at a loss on that investment and it is negatively geared. So you are running at a loss but the key is you’re assuming or hoping that the property will increase in value in the future and will far outweigh this early loss of money.
The Australian Tax Office, one of only a few countries to do so, allows this loss on a negatively geared property to be offset against other sources of income. Because you’re paying less tax on your reduced income, you can reduce the amount you are losing in the form of this tax deduction.
Negative gearing effectively offers you tax benefits while providing the opportunity for your property to make capital gain over time.
Seeing as the property is costing more than it is making, the investor must cover the difference out of their own pocket. This obviously comes with some risk and is a reason negative gearing is a tactic often used by higher income earners to reduce tax in the short term while they make money from capital gains in the long term.
If you are a property speculator or are paying a lot of tax, negative gearing might be a good option for you. Call Perry Finance today if you are considering taking out a loan to invest in a negative geared property.
The Risks
- Buying a property that fails to increase in value over time, or indeed goes down. This means your early loss will continue to be a loss for the duration of the investment.
- Your tenant fails to pay rent on time or the property remains vacant for a period of time. You’ll need to have some funds to cover in case this happens.
- You run out of cash to cover the payments. You can take out mortgage insurance to cover yourself against this.
