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Understanding Negative Gearing

17 Jul 13

One part of the property sector that can seem particularly confusing is the concept of negative gearing.

If you have an interest in the industry, are new to the game or an old hand who needs a refresher, read through these pointers as a guide to the seemingly bizarre facet of property investment, and you'll understand it in no time.

What is it?

Negative gearing occurs when an investor borrows money to buy a property, and then rents it out. Of course, investors are subject to the same interest rates as everyone else, so that loan will have additional interest charges on top of the required repayments.

Usually, these repayments, and the interest on the loan would be covered by the rent paid to the investor by the tenants.

Sometimes however, these payments don't cover the repayments and the interest, or there are costs associated with the property such as upkeep that will mean that the investor is actually making a loss on their investment, which is when it becomes a negatively geared property.

Why would an investor hold onto a property like this?

You'd think anyone who didn't plan their investment to actually bring in revenue was unfortunate, and you'd think anyone who held on to a negatively geared property wasn't particularly wise, but there are benefits for this kind of investor.

The investor can claim tax deductions on the full amount of their rental expenses against their other income, so when balanced correctly, it can in fact work well.

Which is assumedly why over one million investors reported negative gearing in the 2010/11 financial year, according to the Australian Tax Office.

Why is it good for Australia?

So why would the government give tax out deductions like this? It is because negative gearing allows investors to provide more affordable housing for many Australians, which in turn means that the government, and the tax payer, have fewer properties to fund into construction to meet housing demands. This way, negative gearing can work well for everyone.