Negative gearing- the harsh truth

Back in the late 90s early 2000s, negative gearing was the financial catch word of the moment. Anyone who was anyone was talking about negative gearing and how they need to set up their investments with this strategy in mind.

Negative gearing is still relevant, but I am going to break it down for you.

Generally speaking negative gearing shouldn’t be the reason that you decide on an investment strategy. It will sometimes be a result of a strategy but it shouldn’t be the aim.

Negative gearing can save you some tax, but in order to save that tax, you need to be taking a hit on income. It essentially means that the cost of your investment is more than the income it produces. In the long term this is not worthwhile, so it should be considered a short term strategy.

Yes you will have some tax deductions at tax time, but remember there is a difference between a tax deduction and a tax offset. A tax deduction lowers the amount of taxable income you have, and a tax offset is an actual monetary rebate from the tax department.

Having a negatively geared property will provide you with a tax deduction, which is great, but it also means that your investment is making a loss. In order for the strategy to be worthwhile, you need to feel confident that when you do eventually sell your property, you make a large enough profit to make up for the lost income for however many years you owned the property for.

That is the ultimate goal for negative gearing: Taking a hit initially to reap the rewards when you finally sell.

If you have an investment property that is negatively geared, to eventually move into, then the exercise is pointless. You have an investment that is running at a loss, and if you don’t intend on selling it, you will never recoup this loss.

If however you have an investment property that is positively geared, it means that the rental income you receive covers your interest repayments and then some. Tax advantages are great, but making money off your investments should be the ultimate goal. If you have to pay a little bit more tax, it means that you are making a little bit more money, so that’s always a positive.

So next time someone throws a fancy catch word at you like negative gearing, ensure you know what it really means. If you negatively gear, you are making a loss on your investment, plain and simple.

– This post is from our resident senior financial planner, Cara Brett. Check out her details in our about us page.

Posted in: Investments and Cara Brett