You have 0 free articles left this month.

The facts about negative gearing

30 NOV 1999 • By Phillip Tarrant • 2 min read • Hotspots

Negative gearing is a popular technique with Australian property investors because of its tax advantages, but it is not without risk.

spi default article image em4omm

There’s no doubt negative gearing has been one of property’s biggest buzz words in recent years. And there’s good reason why: with the right approach it can provide great tax advantages and cash flow benefits favoured by many landlords.

So what exactly is negative gearing and how does it work? Gearing essentially refers to the act of borrowing to invest. A property becomes negatively geared when the costs of owning it exceed the income it produces – i.e. you are making a loss.

You’re out of free articles for this month

Why would you choose this approach? For investors there is one key reason – to maximise the return on their initial investment, or in other words, minimise the amount of money that they put down on the property from their own pocket.

For a simplified example, an investor buys a $500,000 property, puts down $100,000 (or 20 per cent of the value) of their own money, and takes out a $400,000 interest only loan.

Over a 12 year period let’s say the property doubles in value, so it is now worth $1 million. When the investor sells the property, and repays their $400,000 interest only loan, they will recoup a gross figure of around $600,000.

That represents a gross return of $500,000 on their initial $100,000 investment. But remember that out of this figure there will be selling costs, any rental shortfall over the period and of course capital gains tax.

Nonetheless this opportunity to significantly magnify a small investment by gearing (or borrowing) remains popular as an investment strategy.

There are also associated tax benefits for negatively geared properties as there may be an opportunity for the landlord to offset any loss against their taxable income.

Take care however: negative gearing is a game that requires caution.

Be very wary of developers’ promises about the potential for future returns on an investment, and do as much research as possible to ensure you are making a sound investment.

It is also essential that you seek professional advice on the tax issues associated with negative gearing and never borrow beyond your means. If you have some concerns, or would like some more information, please feel free to get in touch.

Want to see more stories from trusted news sources?
Make Smart Property Investment a preferred news source on Google.
Click here to add Smart Property Investment as a preferred news source.

Tags:

RELATED TERMS

Gearing
Gearing is defined as the relationship between debt and equity of a company that shows how much of its operations are financed by lenders or shareholders.
Negative gearing
Negative gearing occurs when the rental income of a property is not enough to cover the total costs of managing the rental and re-paying the interest portion of the loan.
Phillip Tarrant

Phillip Tarrant

AUTHOR

Phillip Tarrant is executive editor – Real Estate at Momentum Media. He is also an investor with a large property portfolio.

He leads the content strategy and corporate growth for a range of market and business intelligence platforms at Momentum Media, including Smart Property Investment – the authoritative voice for Australia’s property investment community.

As head of the Smart Property Investment Podcast Network, he also steers the largest network of property podcasts in Australia, which collectively generates nearly 2 million downloads every year.

There are over 2.6 million investment properties in Australia, with over 2.1 million Australians (or around 8 per cent of all Australians) owning one or more investment properties. A vibrant and critical sector for creating wealth for Australians, the property investment sector is expected to remain a pillar to the national economy.

For nearing a decade, under Phillip’s stewardship Smart Property Investment has been informing and educating property investors on the tactics and strategies to create wealth through property.

Trusted by over 100,000 Australians each month as the turn-to independent resource for property market insights and information, the brand supports the mantra of "for investors", by investors’, drawing on the unique position that Phillip and Smart Property Investment share, warts and all, its own journey through property.

The Smart Property Investment Show, part of the Smart Property Investment Podcast Network, is one of Australia’s most popular podcasts, forming the keystone of an integrated digital platform delivering daily property updates, live broadcasting, insights, opinion and data to property investors across the nation.

Underpinned by a content team universally recognised for their knowledge of the sector and approach for clear and concise communication, Smart Property Investment has become a central part of Australia’s property community.

About Momentum Media

Momentum Media is a leading media and market intelligence company, and the business behind Smart Property Investment, REB and RPM.

Guided by a strong sense of purpose to support our communities, Momentum Media has forged its place as one of Australia’s most influential media and professional development businesses.

We have been equipping Australia’s corporate, investor and SME sectors with market and business intelligence for over a decade.

Across an integrated business supported by digital, events, broadcast, research, print and social platforms, we are guided by the purpose: Be Better informed.

This passion for informing, educating and inspiring drives us to build more engaged communities, delivering greater leadership to the markets we connect to and forging closer relationships with our audiences.

Being at the forefront of media innovation, backed by a pioneering spirit, has been central to Momentum Media’s growth.

We’re an evolving, forward-thinking business based on a purpose that supports corporate Australia and the markets critical to our nation’s economic prosperity and security. We’re also focused on delivering exceptional value to our commercial partners.

We adapt on a daily basis to rapidly changing market places; we’re a fluid media business, unanchored to any particular technology, channel or tone of communication.

With a reach spanning nearly 2 million professionals, high-net-worth individuals and SME business owners, we’re connected to the rapidly changing preferences and attitudes of our communities – and we’re making a positive contribution for our communities to thrive.

Know more