Negative Gearing | | Wilson & Assoc Chartered Accountants

Is negative gearing worth it?

Negative gearing is a common catchphrase in the investment and tax scene. In this article, we take a closer look into its various implications and let you be the judge of whether it’s worth the candle.

What is negative gearing

Negative gearing is when the expenses of owning and renting out an investment property exceed the rental income it generates.

How does negative gearing work ?

When a property is negatively geared, the rental income received from tenants is insufficient to cover the expenses of owning the property.

These expenses typically include mortgage interest, property management fees, maintenance costs, insurance, and council rates. The shortfall between rental income and expenses results in a net loss for the investor.
The investor can then deduct these losses from their taxable income, thereby reducing their overall tax bill.

What are the advantages of negative gearing?

•   Saving: Repaying a property loan is an effective strategy to induce a saving habit.
•   Tax reduction: All the costs of property ownership and management, including mortgage interest and the building costs, become tax deductible.
•   Capital growth: Enjoy the potential of capital appreciation of the property over time, while claiming minimizing tax with the negative gearing losses.

What are the  drawbacks of negative gearing?

•   Cash flow: The key concern is that of cash flow.  Negative gearing means you must fund the rental cash losses, or the excess of interest and rental expenses over the rental income. This cash pressure can be magnified in time of high inflation and rising interest rates.

•   Market Volatility: The success of negative gearing as a strategy is heavily dependent on factors such as property market conditions, interest rates, and economic stability. Economic downturns causes stagnant property markets which will in turn cause higher interest and lower capital growth and thereby reduce the effectiveness of this strategy.

Who is negative gearing most suitable for?

Negative gearing is suitable for all investors who are looking to reduce their tax liability while also potentially benefiting from long-term capital growth, the higher their income, the greater the tax savings.

Caution is advised before engaging in negative gearing, to conduct a realistic assessment of the loan repayment (allowing a margin for rate increase), on-going cost of ownership, the cash flow requirements,  compared against the property value and growth potentials.

What are the alternatives to negative gearing?

Alternative investment strategies include positive gearing, neutral gearing, property flipping, or investing in other asset classes such as shares, bonds, or real estate investment trusts (REITs).  Each strategy has its own set of pros and cons. We recommend seeking professional advice to choose the options that best aligns with your financial situation and objectives.

How can Wilson & Assoc help?

Talk to our friendly team to understand the effectiveness and impact of negative gearing for your specific situation.


Source: ATO

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Disclcaimer: The information provided within this article is general information only.  None of the comments in these notes are intended to be advice, whether legal, financial product or professional. You should obtain specific advice regarding your particular circumstances from a tax or legal professional.

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