Negative gearing explained
24 July 2020
Negative gearing is a popular strategy among Australian investors. Over the past few years it’s become a media buzzword and a bit of a political hot potato as well. So if you’re thinking about investing in property and would like to know what negative gearing is, or you’d just like to know what all the fuss is about, then check out our negative gearing breakdown below and find out how this tax minimalisation strategy is being used.
What is negative gearing?
Negative gearing is where you borrow money to invest and the income from the investment (e.g. rent) is less than what the investment costs you (e.g. in interest and other related expenses). Essentially meaning that you’re making a loss on your investment and off-setting this against your taxable income.
Negative gearing is most commonly used in Australia on mortgage interest for an investment property loan. But you may be able to also negatively gear investment funds used to purchase shares – where the dividends are less than the interest on the loan. For example, if you were to buy shares in a company using borrowed investment funds that cost $10,000 in interest and the shares only return $7,000 in dividends, then your investment has lost $3,000. This means you would now be negatively geared and can use this $3,000 as a deduction from your taxable income.
What is positive gearing?
Negative gearing’s media-shy brother is positive gearing. With a negatively geared investment property, your investment runs at a loss. Whereas a positively geared investment is one where you make ‘positive’ income from your rental property payments. For example, your tenants pay more rent than the expenses incurred from the interest repayments on your investment property loan.
Before you think about investing— negatively or positively— you should always seek independent financial advice. To see if gearing could work for you, have a chat with a qualified financial planner. They’ll be able to advise you on various tax-effective investment strategies, as well as your unique financial goals and needs.
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