Can someone please explain what it means to 'negatively gear' a property in simple language and when is a good time to do it? My wife (casual) and me (full time) earn around $110K between us and pay rent of $380 easily. Can we do negative gearing to buy a home?
Top answer provided by:
Pamela Anderson
Hi Greg,
A broad description of a “Negatively Geared” property is when you purchase a property and you have a loan, you receive rent from the tenants, the rent you receive from the tenants is not enough to cover the loan or the cost of the property and you are required to use your own money to cover this cost.
This means your debt is negative as you are spending more of your own money. This is not a bad thing however as it can be claimed as a tax deduction as it is a cost of operating an investment.
A negatively geared property may also have the loan covered by the rent, however a depreciation schedule (only applicable to new property and a schedule that allows you to claim the wear and tear of the fittings, taps, floors, etc) and cost of running the property are more than the income you are receiving and you are required to cover the cost from your cash flow, again these can be tax deductions.
In many cases negatively gearing is not as overwhelming as it sounds and can be an excellent way of purchasing a property. If you are meeting all of your living expenses and have surplus cash then it would be a good time to consider a negative gearing strategy.
The higher your tax bracket the more benefit it is to you, however it can work for people on your income provided you are prepared for the possible additional cost such as rates, repairs and insurances.
Negative gearing is only available on an investment property. Having said that you could use the strategy to purchase an investment property, negatively gear it, and any tax benefits could be saved for a deposit or paid of the property to increase your equity. Then you could use the investment property to assist you to purchase your home.
Kind regards,
Pamela Anderson
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Comments2
"That is a good point you make, Sharan. Investing to make a loss, just to claim a tax deduction, isn't really a pragmatic investment strategy. Investing in any growth asset should be for the long term growth potential and not for the short term ancillary benefits such as tax breaks - after all, any tax rule change will place you at a great disadvantage. It is important to note that you'll have to hold that loss making asset for as long as it takes to make enough capital growth to offset the holding costs. If you cannot do that, you'll be placing your financial future in grave jeopardy. "
Andrew Akuoko 10:38 on 13 Nov 17
"I think a fundamental factor that needs to be considered with any negatively geared investment is the growth of the asset over time. Negative gearing quite simply means you're paying more than you're earning on the asset. Costs exceed income. So simply put, a loss. No doubt there are tax benefits which can help offset the loss, but investment decisions should always focus on the investment first, tax second. If over the course of owning an asset, you've continuously made a loss from a cash flow perspective, it is absolutely vital you're measuring the growth of the asset to assess the overall gain, over the time you've held it. "
Sharan Sheth 13:42 on 03 Nov 17