What is negative gearing?

Negative gearing can be attributed to any asset but is commonly used for investment properties. Negative gearing is more of a tax strategy than an investment one; it occurs where expenses from an asset are higher than the rental income earned on the asset.

The advantage of negative gearing your investment properties is that you can deduct losses associated with your property against the income you earn from your salary. Generally, the tax policy in Australia dictates that people pay tax on their personal income, deduct expenses which nets taxable income. Hence, tax is only applied to profit not to revenue.

The ATO recognize that people have different circumstances and that people generally have different costs attributed to producing their income.

It is advantageous to make a technical loss on an investment property, whilst the property itself appreciates in value. An increase in equity is still achievable whilst making ‘interest only’ payments on the loan. Thereby still making a profit on the property.

So, we know that negative gearing is used to achieve a technical loss whilst gaining equity. It is possible to carry on this kind of strategy for many years, but you’ll have to watch out for market volatility. This kind of investment strategy is scalable, and many investors have more than one negative geared property using this strategy.

It would not be uncommon for a couple to have a few negative geared properties. So that both spouses pay little income tax.

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