Negative Gearing on Property
Negative gearing on property is when you borrow to purchase an investment property and the cost of borrowing exceeds the returns (income) from the property. That is when the annual interest payable on the loan used to acquire the property, plus other expenses incurred in maintaining the property, exceeds the annual rental income the property generates. So, why would you want to do it? Because of the opportunity to reduce your taxable income.
Put simply, a negative gearing example on property is when:
- You borrow to acquire an investment property
- The interest and other costs you incur are more than the rental income you receive from the investment (in other words you make a cash loss), and
- This cash loss is offset against income from other sources, thus reducing your taxable income, and hence the amount of tax you have to pay (compared to the tax you'd pay without the investment).
In short, negative gearing makes it easier for investors to accumulate properties and let them grow in value over time.
Naturally, to make this a worthwhile strategy you have to buy an investment property at the right price in the right location so you have steady rental income and your outgoings are manageable. We can give you the tools to help you determine if a property you wish to invest in meets these criteria.