What is Negative Gearing?
Negative gearing is a common investment strategy in Australia, where an investor borrows money to purchase an asset, such as property or shares, with the expectation that the income generated from the investment will be less than the cost of borrowing and maintaining the asset. This creates a net loss, which can then be used to offset the investor's taxable income and reduce the amount of tax they have to pay.
For example, if an investor buys a rental property for $500,000 and borrows $400,000 at an interest rate of 5%, the annual interest cost would be $20,000. If the rental income is only $15,000 per year, the investor would have a net loss of $5,000, which could be used to reduce their taxable income.
The Australian Taxation Office (ATO) allows investors to claim tax deductions for expenses incurred in earning income from an investment property or other investment assets, including interest payments, property management fees, repairs and maintenance, insurance, and depreciation. These deductions can be used to reduce the investor's taxable income, and if the deductions exceed the income earned from the investment, the resulting loss can be carried forward to future years.
While negative gearing can be an effective way to reduce tax liabilities and build long-term wealth, it also involves some risks. If the income from the investment asset does not increase as expected or the expenses exceed the income, the investor may end up with a larger loss than they anticipated. Additionally, borrowing to invest can increase financial risk, as interest rates and property values can fluctuate over time. It is important for investors to carefully consider their financial goals and risk tolerance before using negative gearing as a strategy.
