What is negative gearing?

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gump
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Joined: Mon Mar 16, 2015 6:25 pm

What is negative gearing?

Post by gump »

Hello home loan experts,

I’ve been thinking of investing in a property for a few months and while I was at a dinner with my friends a few days ago, and we discussed property investment for a while.

My friend mentioned ‘negative gearing’ and it took me by surprise. I knew about gearing but had no idea what negative gearing was. He went on to explain how he had used it to save tax but I didn’t get it.

It was not a very long conversation and I didn’t get a chance to ask him again. I visit this forum when I have difficulty in understanding mortgage related terms and this always has been a great source of information for me.

So, what is this negative gearing exactly?

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Otto Dargan
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Re: What is negative gearing?

Post by Otto Dargan »

Hi and welcome to the forums gump.

Negative gearing means you borrow to invest, but in such a way that you make a loss. While you’re at loss, you’re permitted to claim the net loss as a tax deduction against your other income.

To make this more clear, let’s suppose that you’re earning $80,000 a year and you own a rental property. This property is rented at $20,000 a year and you spend about $30,000 in interest and running (maintenance) costs.

There is a loss of $10,000 incurred from your investment property every year. This loss on your investment property means that your taxable income is reduced equal to the loss amount that you incurred. Your final taxable income will be $70,000.

This reduction means that you’ll be saving 30% tax, which is equal to $3,000. Your after-tax loss on negative gearing is $7,000 and it is cushioned by the tax reduction you receive.

You may also claim depreciation benefits on the property allowing you to reduce your taxable income further. For example if you claimed $5,000 in depreciation then your taxable income could be reduced by $15,000 (including your rental income of $20,000 and running costs of $30,000).

This way, your taxable income reduces from $80,000 to $65,000, thereby saving you 30% tax on that reduction, being $4,500. So your after-tax loss reduces to $5,500.

Cheers,
Otto
Otto Dargan
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gump
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Joined: Mon Mar 16, 2015 6:25 pm

Re: What is negative gearing?

Post by gump »

I still don’t get all of it. I understand that we save tax but how will we overcome the loss itself?

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Otto Dargan
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Re: What is negative gearing?

Post by Otto Dargan »

Hi gump,

That’s a good question. As you pointed out, if you are making a loss on your investment property each year then sure you’re saving on tax, however you are still losing money! The reason that investors often invest in negatively geared property is that the growth in the property usually outstrips the holding costs.

When you eventually sell the property you pay capital gains tax on the profit from the sale, however the tax benefits of negative gearing helps you to hold more investment properties without impacting your lifestyle.

If you would like to know more about negative gearing or capital gains tax then you can check out our website. We can also be reached on 1300 889 743 or you can fill in our free assessment form to see if you qualify for a loan or not.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

gump
Posts: 10
Joined: Mon Mar 16, 2015 6:25 pm

Re: What is negative gearing?

Post by gump »

Thank you so much for clearing that up! I was confused before but now it’s very clear. I’m going to browse through your website to find out more about it. I’ll give you a call once I’m ready to invest. Cheers!

orru
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Joined: Mon Mar 16, 2015 6:34 pm

Re: What is negative gearing?

Post by orru »

Hey there,

I’ve been following this thread since a couple of days. I got to learn a lot and I was hoping gump would ask about positive gearing as well.

I was under the impression positive gearing was beneficial for investors. I’m not so sure about it anymore. Can anyone here clarify this for me?

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Otto Dargan
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Location: Sydney, Australia
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Re: What is negative gearing?

Post by Otto Dargan »

Hi orru,

You’re absolutely right. Positive geared investment properties are beneficial to investors.

While most investors rely on the capital gain to make a profit and pay off their investment loan as soon as possible, some hold their properties for long term in which case the properties often become positively geared.

This happens because the rent increases over time however the loan amount does not, so eventually the rent income is more than the holding costs of the property.

Some investors buy properties with exceptionally high rent returns which means they are positively geared from day one. In some cases these properties experience lower capital growth.

If a good property is picked then it may be possible to get the winning combination of a high growth rate and a high rental return.

Although positively geared properties do not have the same tax benefits of negatively geared property, keep in mind that the goal of investing is to make a profit, not to avoid tax.

For this reason positively geared properties are excellent investments if they also have high capital growth.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

orru
Posts: 8
Joined: Mon Mar 16, 2015 6:34 pm

Re: What is negative gearing?

Post by orru »

That’s what I thought too. Thanks for confirming it to me. I’ll definitely recommend this forum to my friends and family for any home loan related questions. Have a good day!

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