Negative gearing is one of the most interesting forms of investment property types. The tax return potential is huge, even though the returns on paper might actually make them look like a bad investment. Negative gearing your investment property in Australia can be a great tool for your investment portfolio if you are a certain type of individual. Before we clarify more about who this kind of investment property is most beneficial for, let us run through a basic definition of an investment property.

Investment Property

Investment properties are residential homes, buildings, or commercial complexes purchased with the intention of renting them out. The investor does not purchase the property with the intention of using it for themselves. The intention of the purchase is to make money off of the property and find maximum rental return against the cost of maintaining the property and the property taxes that the owner has to pay. Negative gearing is quite counterproductive to the term “Investment property” is seen only on the rental return sheet against the property purchase prices.

Negative Geared Property

More often than not, investment properties are bought with loans or mortgages. The majority of people buying investment properties buy them to make profits. Making profits on an investment property can be a very calculative affair, especially if it is bought through mortgage payments. An investment property requires maintenance costs (electricity, water bills, periodic upkeep costs), mortgage payments, and the owner is also charged with property tax. These cash outflows must be accounted for to make a profit on the property. So, the owner must charge a rent that covers these costs, as well as generate some revenue on top of these costs. This is called a positively geared property.

Now, let us reverse this situation - imagine that the owner is making negative income (losses) from the investment property. So, the rent is not able to generate a profit over and above the cost that the property requires to be kept. This kind of property will be termed as a Negative gearing property. For example, the positively geared property appreciates in value each year due to a fluctuation in property prices, and it is also making rental income. A positively geared property is charged higher in taxes, and the owner has no rebate on their salary/business primary source of income either. A bit earlier, we were talking about why negative gearing can only benefit specific types of Australians.

Benefits of Negative Gearing in Australia

There are several benefits of negative gearing property. If the owner of the property shows the calculations of the loss on paper, he/she declared a taxable loss. The taxable loss can then be used to take tax rebates on the owner’s personal income. This can greatly advantage people from high-income groups. For example, if Bill owns a negatively geared property and makes $18000 from it per year, but the cost of upkeeping the property (mortgage, maintenance, and other costs) is $20000 - Bill is making a loss of $2000 on the investment property. Let us assume Bill’s annual income is $100,000. His annual income will be charged with much lower taxes because he is making a loss on his investment property.

This loss now enables him to save directly from his annual income taxes, which in turn gives him a return in the form of tax rebates. Many people believe negative gearing is actually a profitable method of making money through investment properties in Australia. A negative geared property has more capital growth opportunities compared to positively geared properties. You are saving tax on your income, and you are breaking even on your investment property which is appreciating in value slowly over time.

Positive Gearing vs Negative Gearing Properties

Positively geared properties are steadily making profits for their owners, while negatively geared properties are saving taxes on the owner’s annual income. Both are growing capital in their own way, but there is a better way to have a property investment portfolio. Somebody who wants to make money through investment properties needs to diversify their portfolio. Just like any market where people want to make money, the property market also serves an investor best if the portfolio is split rationally into tax savings and capital growth assets.

The ideal portfolio can make a steady income for the investor, as well as rid them of additional taxes on positively geared properties. Negative gearing a property can play a huge role in a person who has a highly taxable income. It can reduce the tax burden on your annual income by a great extent, while your positively geared property can steadily make money for you. Having a negatively geared asset on a lower income will not prove to be beneficial - because the tax rebate will not outweigh the loss made on the property. It is a good idea to get a positively geared investment property if you are on a lower side of income. However, if you already own a profitable property, and you make a higher income annually, you might find it beneficial to add a property with negative gearing.

No matter what kind of investment property you want to own, we can make the process of getting loans easier for you. Get in touch with our brokers to find the lenders that will serve your purpose in the most practical way.

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