How Does Negative Gearing Work?
If the interest being paid on a home loan exceeds the rental return on the associated property, the property is negatively geared. In other words, if your property costs more than it’s making you (putting you at a loss), you’re executing an investment strategy known as “negative gearing”.
As you probably guessed, it’s called neutral gearing if your rental returns and the payable interest on your home loan are equal – and positive gearing if you’re making a profit.
So why opt for negative gearing over breaking even or making a profit?
Negative gearing operates on the expectation that your property’s capital growth will more than make up for the losses you accrue. If you choose your property wisely, it should go up in value every year.
The appeal of negative gearing over making a straight profit lies in the tax-related perks. The loss associated with the ownership of the property can be offset against other income earned, reducing your assessable tax income and as a result, the amount of tax you pay.
Is negative gearing legitimate, or just a loophole?
Negative gearing has been a contentious topic lately, with political parties proposing varied ways to handle the issue. The Turnbull Government is considering introducing a cap on the amount you can claim, and Bill Shorten recently expressed interest in restricting negative gearing to new homes.
However, negative gearing is considered a viable option for low income families who want to enter into a long-term investment and build wealth. Also, its availability as an option leads to a higher number of available rental properties and investors.
Graham Wolfe, Chief Executive of Industry Policy at the Housing Industry Association, has a strong stance when it comes to negative gearing: “Negative gearing should not be changed because it will distort the market in many ways and at many different levels.”
It might pay to wait and see how the negative gearing issue develops before making any early investment decisions. A change in government policy could affect its future validity.
If you’re looking to invest in property, negative gearing is something you might want to explore. It can be a solid investment strategy if you choose a property wisely and seek good financial advice.
The cost of your home loan can drastically affect your financial planning, so it pays to speak to the experts about it. You can contact us for advice about the best options for you when it comes to your mortgage.