Understanding Real Estate –What is Negative
Gearing
Real Estate business can be difficult to understand for a newcomer. There are several things
to consider when entering the world of investment in which can vary depending on what it is
you are looking for. Home loan
It can be difficult as your focus is split between various things such as cash flow, growth and
rental yield just to name a few, which all can affect your decision process.
It is more than just betting on a property in hope of its value increasing in the future.
Depending on where one invest, a topic that’s sure to come up when you’re learning about
investment property is negative gearing.
So what exactly is negativegearing?
Negative Gearing
Negative gearing is a kind of financial leverage used to describe the purchase of any asset
that may result in an income. In simple terms, if the combined cost of a running an
investment including the interest expense is more than the investment income, then it will be
a negative gearing property. First home loan deposit
It’s a taxation strategy that aims to benefit you if your outlay exceeds your income, this should
only be seen as a benefit if there is a substantial increase in the return on your investment
Property.
Profiting from Negative Gearing on Investment Property
Negative Gearing should only be plausible if the return on growth/sale of the property
increases substantially from the originally purchase price + cost.
Example –My original purchase price of the property was $500k. Every year my “NET”
expense for that property is $4000 per year, based on a tax bracket of 30%, I can claim back
$1200 from negative gearing as a benefit, therefore my out of pocket expense is $2800.
However, every year the Investment property is growing by 5%, therefore my wealth has now
grown
$25,000,Less out of pocket expense, my “Net Growth” forthe year is $22,200Home loan
repayments
Tax Deductions and Savings
With negative gearing, you are eligible to claim a loss from the investment property as a tax
deduction against your income.
You can receive tax savings as a refund at the end of your financial year when you’re
preparing your tax returns in the one hit, however it is possible to also do a tax variation with
your employer so you pay less tax upfront at every pay cycle –please seek advice from your
accountant.
Special Considerations for Negative Gearing
Property owners should have the financial ability to be able to fund the shortfall on such
investment property’s. They need to fund it themselves until the investment property is sold
or it’s turned into a positive geared property.
Concluding Remarks
Assessing the negative gearing of your property is an important part of real estate
investments. Most lenders will assess negatively geared properties differently. Stamp Duty
Concession
Negative gearing can also be used to benefit the property owner which is why some people
utilise it for tax savings and tax deductions.
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