Negative Gearing Your Investment Property

One reason that people negatively gear their investment properties is to reduce the amount of tax they pay.

Although the property may not be profitable, it could still be a wise investment. A well-located property can rise in value over time, producing a capital gain, and the annual loss can often be offset against other sources of income such as salary or wages.

If your annual salary is $80,000 and your investment property makes a $20,000 loss for the year, you will pay tax only on income of $60,000—not $80,000.

Nonetheless, negative gearing is not infallible. Be aware of the potential pitfalls to maximise your investment returns.

Understanding Capital Growth

It’s important to consider tax-saving strategies within the context of your overall investment strategy. Will any losses be compensated by future capital gains? For this to happen, your property needs to rise in value by more than your out-of-pocket expenses plus any potential capital gains tax.

There is no guarantee that you will make money from capital growth. The Australian property market has generally risen over time. However, the market moves in cycles over shorter periods. Therefore, if you sell in a soft market, you could make a loss.

Cost Reduction & Negative Gearing

If you use negative gearing, your investment may make an annual loss. You can lower the tax you pay on other income by claiming this loss as a tax deduction. Depending on your tax rate, this may cover up to 45% of your losses—not the full amount. The remainder comes out of your pocket. You may also need to ensure that your cash flow can cover costs if the property is vacant for periods of time.

No Guarantee Regarding Capital Growth

Negative gearing strategies do not necessarily guarantee a profit. They can help you save on tax and make owning a rental property more affordable. But there are many alternative options to consider.

A positively geared property is one where the rent exceeds the costs of owning the investment. This adds to your income rather than reduces it. If that sounds attractive, you may need to find the right property for your investment situation.

It is vital that you speak to a tax professional and accountant to figure out the right investment strategy for you. For your mortgage needs, talk to a My LMI Group broker.