What is Negative Gearing?
What is Negative Gearing
Gearing is the process of borrowing money to purchase an asset. Negative gearing refers to the fact that the interest paid on the loan is more than the income from the asset which means you are making a loss. To fully understand negative gearing you will also need to understand neutral and positive gearing.
What is Positive Gearing?
When a property is positively geared the amount of rent paid to you by your tenants is more than your interest payments and your expenses.
What is Neutral Gearing?
Neutral gearing is when the money you pay for costs such as renovation, insurance and interest is the same as the amount of money that was invested.
Due to the wording, the assumption is that there are no benefits associated with negative gearing. Also, since you are losing money where is the advantage in that? The bottom line is that most properties purchased for rental purposes are negatively geared. Your rental income will not be as much as the interest payments. The benefits come from the fact that Australian tax law allows you to claim back the interest on your loan repayments as well as some other costs you have paid. This is only available if you are renting the property out.
Another benefit associated with negative gearing is that you can offset any losses against income you have earned like your salary. This reduces any taxable income which reduces the amount of tax that you pay. You can also benefit from capital growth.
Negative gearing will work for you if the money you make out of the capital growth is more than what you will lose in rental shortfall.
As with all investments, any strategy should be aligned to your personal circumstances and the amount of money you are willing to risk.