The term “negative gearing” is very common among Australian property investors, but for the rest of us who are not into investing in property or planning to venture into it, understanding terms like this will be very beneficial.
What is "gearing"?
This refers to the process of getting a loan or borrowing money to acquire an investment such as a property.
Before we go into negative gearing, let’s take a look at the term “gearing”. This refers to the process of getting a loan or borrowing money to acquire an investment such as a property. It comes in three types. Negative gearing is when the interest payable on the loan is bigger that the income you get from the asset. Neutral gearing is when the interest you’re paying on the loan is the same as the income, while positive gearing means the interest on the loan is less than the income.
Let’s focus on negative gearing. Here are three simple things worth-knowing about negative gearing in Australia:
For some people negative gearing isn’t always negative
Negative connotes a loss, but it’s not necessarily the case for some investors. When it comes to investing in property, negative gearing can be a positive thing through capital growth. How? If the money earned from capital growth is more than the loss incurred in rental shortfall, negative gearing is beneficial.
Negative gearing can help reduce the tax you need to pay
Australian property investors can take advantage of negative gearing to minimise the amount of tax that they need to pay. When you make a cash loss, it is offset against other income sources. This reduces your taxable income. In this case, the tax that you need to pay is lower that the tax to be paid if you don’t have the investment.
Look for investment opportunities with good potential for capital growth
An Australian property investor looks for areas with capital growth potential. There may be cash loss for the meantime, but the investment will generate profits in the future, with capital growth compensating for the short-term loss.
These are just three of the many things you need to know about negative gearing in Australia. Cash losses will be there but there will also be future gains. To have a better understanding of terms like this, you may want to consider seeking investment property advice from experts in the industry.
It really comes down to your financial circumstances and the advice your receive from trained professionals. Speak to your tax advisor and financial advisor to determine if negative gearing is something to consider for you.
Do you know other things about negative gearing and investment property tax in Australia? Share your investment property advice in the comments section.