Negative Gearing in tax terms is where you borrow to obtain an investment, and the interest, fees and any other investment related deductable costs exceed the income received from that investment.
The most common form of negative gearing is a rental property, but negative gearing can also be associated with shares and managed funds in the form of margin loans.
Example: You decide to buy a rental property as an investment for negative gearing purposes. You have financed the property through an investment loan with the bank. In the first financial year you earn $10,000 through rental income, while you have paid $14,000 in interest on your bank loan, as well as $1,000 in agent commissions, $1000 on council rates, $500 on repairs and $500 on water rates related to the property. Your total expenses ($17,000) exceed your total income ($10,000) on your investment.
In the short term, any losses (i.e. the $7,000 loss in the example above) can be offset against your taxable income and is there as a tax benefit. In the long-term, your investment, if successful, is there to rise in value and make a capital gain.
There is no surprise that in this country, with the increasing prices of the Australian property market, that negative gearing in the form of investment properties is highly popular and a growing trend.
However, investors must understand that there are many risks involved in negative gearing, and that is where we, as accountants are here to assist. We can give you the tax advice and implications. Remember, despite a house expected to generate a gain in value, it doesn’t always happen.
We are here to ensure you have the right knowledge to assist in your planning, and then help you through the growth of any investment.
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