What is Negative Gearing?
Negative Gearing is when you purchase a property and to expect to make money from all the Tax deductions you can make from your property investment. This is why it is called Negative gearing.
If you are earning a high income for example over $100k per year and also your partner and or spouse this could be a good thing. However if you are earning a lot less than $100k per year this would be a disadvantage to you. In a lot of cases you could spend $1.00 and only claim back 30cents or less in your Tax return.
In the 2017-18 Budget, the Government announced that it intended to deny all travel deductions relating to inspecting, maintaining, or collecting rent for a residential investment property from 1 July 2017.
More information on this please go to the ATO website.
Negative gearing also works on high capital growth – What if you have low or no capital growth in your investment property? This means you are paying out money for a depreciating asset.
If you are making a loss on your investment this is costing you money you may not have and also you may have to work another job or dig into your savings.
Just remember negative gearing is a popular tax minimisation strategy – However to make this work you must reduce your tax so this also reduces your income.
What if you cannot find a tenant for your investment property?
What if your property falls in value?
What if interest rates rise and you have agreed not to put the rent up for the next 12 months?
Negative gearing is a more common choice for property speculators and/or those with hefty tax obligations.
Five reasons why negative gearing is a bad investment strategy:
- Eats into your cash flow. With a negative geared property you are paying money every single week, month and year into that property. This is because the rent you receive is not enough to pay for the mortgage and all other expenses.
- You have to borrow against equity making you even more negative geared,
If you are borrowing on a negative geared property, which is likely to be your mortgage it is going to go up in value each month.
This means it is going to eat into your cash flow even more and tie you to your job even more. Borrowing against it makes it even more negatively geared which isn’t a positive thing.
- You may have to sell your property,
In order to make money, you have to sell your property, giving up future growth. With negative gearing the idea is you lose money on a monthly basis, but the property will go up in value. You can then sell it, and you can then realize that value. Unfortunately, when you sell the property you will lose the future gains that that will have.
- You are limited in the number of investments you can buy,
If you’re investing in negatively geared properties then you are limited in the number of properties you can afford to own. Let’s say a property costs you $100 a month to own. You might be able to own a few of those, but once you get past 5 or 10 or whatever it might be, you’re going to run out of money to fund those properties.
- If the market goes down or stays stagnant you lose money,
If the market goes down, or even if it’s just stagnant and not growing, you are going to have no way of making money.
Negative gearing relies almost 100 percent on the market increasing in value, and your property increasing in value, in order for you to make money. If it goes down in value, you can’t sell it. You can’t access equity, so you’re just paying money and getting absolutely nothing in return.
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