Negative Gearing

We’re still getting a lot of enquiries from clients looking for a negatively geared investment property.  The reason for me writing this article is that I want to remove some of the myths around negative gearing and how good it really is.  Don’t get me wrong it can be extremely helpful but at the end of the day you have to lose money to be able to claim a tax deduction.

Lets assume you buy an investment that costs you about $40k p.a. in interest, rates and insurance etc.  You then rent the home out and receive $25k in income from the rent.  So you’re making a cash loss on the property of $15k.  This $15k loss then becomes a tax deductible amount as the ATO allows you to claim it as a deduction if you have expenses related to creating an income which this complies with.  Lets assume you get a tax return of $5k at tax time and that means you’re still out of pocket by $10k p.a.  So unless the investment property is growing by more than $10k per year in capital then you’re losing money.

Wouldn’t it be better to have a positively geared investment property?  Of course it would, but you’d be surprised how many clients we still have that would prefer a negatively geared one.  I’d love to have a larger tax bill as it means I’ve earnt a lot more money.  So even though it’s best to find a positively geared property it’s not allows that easy to find.  In the current market, with interest rates where they are, we can find a lot of negatively geared but positively cash flowed properties and this is better than a fully negatively geared place.  The amount of deposit you put into the investment property also drives whether it becomes negative or positively geared.

If you’d like further information about negative and positive gearing then please touch base and let me know.  It is a basic topic but I’d much prefer clients fully understand the clear differences.