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The facts about negative gearing

The facts about negative gearing

By Phillip Tarrant | 30 November 1999

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

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.

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.

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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.

RELATED TERMS

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.

About the author

Phillip Tarrant

Phillip Tarrant

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... Read more



The facts about negative gearing
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