In recent weeks, there has been plenty of discussion about the Federal Government’s proposed changes to negative gearing. While it’s a long way from becoming reality, there are implications for many property investors should the proposals go ahead.
So what is ‘negative gearing’ anyway? (Let’s try and break it down). Negative gearing is a tax strategy where the costs of owning an investment property (ie, loan interest, maintenance, insurance, depreciation) are actually higher than the rental income it generates.
By creating a financial loss, negative gearing enables property investors to deduct net losses on an investment property from their other taxable income. While it seems irrational to deliberately create a financial loss, the short-term loss is strategic – it reduces your taxable income. This makes it very popular with high-income earners. Of course, the real goal is capital growth with the long-term capital gain of the property usually far outweighing any losses.
For example; let’s says you lose $10,000 per year over 5 years. This equals a $50,000 total loss. But the property increases in value by $200,000. After selling (and paying capital gains tax), you’re still well ahead.