Negative Gearing Explained with Calculator

To Negative Gear or Not, that is the Question?

Negative Gearing is simply a way of claiming investment expenses against your tax. More clearly it is when the interest that is being paid on your investment loan is larger then the rental income from your investment and through tax deductions provides some relief to the difference. There seems to be two camps on negative gearing, to use it or not so research your choice.

New property investors tend to struggle with the fact that they may be losing money on their first investment property each week. This is where negative gearing steps in to lend a bit of a hand and helps reduce the short fall between interest payments and rental income, using Australia’s tax system.

Many tax purists blame the tax incentives offered by negative gearing on inflating property prices in general but more so in the city markets.

These days it’s really just about the cost of doing business in the short term. What if you purchased a property worth $300,000 now, and after ten years the price doubled would you stress about the $5000 lose in the first year and the rapidly decreasing lose over the next couple of years. With negative gearing help the lose will be less anyway, so if you play the game correctly over the long term you will win big time. I understand that any loses can hurt if you are a wage earner and have a family to support.

“Investment properties normally become positively geared after six or seven years.”

At the moment housing in general is mostly unaffordable to a big chunk of the population and this is one of the obstacles keeping them in the rental market and preventing them purchasing their own home. Although many believe that housing in Australia is still over-valued, but higher wages means that for the few housing is affordable.

Some quick property investment facts:

1. You may be aware that a residentially secured investment loan is cheaper than a margin loan.
2. If you are considering buying an investment property and you aren’t a permanent resident or an Australian citizen then you will more than likely be restricted to buying or building a new property.
3. The current system of negative gearing is a major factor behind the housing affordability crisis in Australia, certain people in the community believe.

“Real estate is a proven wealth-building vehicle”

By thinking in the short term you may be harming your overall benefits of building a sizable investment portfolio. Learning to manage your cash flow from the outset especially when it’s negatively geared will only teach you good habits. The habit of how to budget well and will therefore set you in good stead for the times when rent does indeed double and your investment turns positive. This way you are buying time in the investment market to hold your expectantly appreciating asset.

So you are thinking I still can’t afford an investment property? But what else do you spend your money on that increases in time by borrowing with such great leverage like property investing.

Negative gearing really has only one benefit and that is – “Tax Deductions”

Under current tax law an income producing asset such as a rented investment property which has negative cash flow is allowed tax deductions which may form part of your personal tax return.

So is employing the negative gearing approach to property investing an attractive one. You must realize by now that there is no magic prescription to making money without any type of risk.

Below are two examples of a negative gearing calculator approach to property investing showing you the affordable possibilities? These examples will give you some idea of your potential, but you should contact your financial advisor or contact QA Developments for some guidance and advice in this area.