Negative Gearing - Is it good or bad?
Negative Gearing is a hot topic amongst property investors, with many seeing the tax benefits of doing so. But is it a good or bad thing?
What is negative gearing?
Negative gearing is a practice in property investing where the expense of owning and maintaining the property outweigh the income earned off of that property. This means that the cost of rates, insurance, interest, repairs and maintenance, and all other property expenses, are higher than the rental revenue that the property brings in.
What are the benefits?
The benefits of negative gearing lie solely in the tax impact. Any rental loss incurred during the financial year can offset other income such as salary and wages. This means that the rental loss effectively acts as a tax deduction and can reduce tax payable - or even boost your tax refund.
What other factors should be considered?
To hear that negative gearing reduces your tax liability sounds great in theory - but when you consider all the factors, you're still losing money.
For an individual earning $100,000 in the 2022 financial year a rental loss of $5,000 would save them $1,625 tax, but they're still out of pocket $3,375.
Negative gearing on its own only minor tax benefits - but whether it's worth doing or not also depends on other factors, such as your long-term plan for the house.
If your plan for the property is to keep it for a short amount of time and sell it for close to the purchase price, then negative gearing will lose you money. If, however, your plan for the house is to hold onto it for a long time and sell it at a much higher price than what it was purchased for - then depending on how negatively the property is geared, you may come out ahead and the small losses now are made up for later when profit from the sale of the property is received.
Are there any exceptions to this?
The one exception to this is negative gearing due to depreciation. Expenses that cost over $300 for an investment property are depreciated over a number of years rather than being claimed upfront. As well as this, some eligible investors are able to claim a portion of the cost of the building (called Capital Works Division 43) over a period of time against their rental income. This can be an effective strategy that creates a rental property loss without the cash loss occurring during the financial year. It's important to keep in mind that the money for these expenses was outlayed at some stage (whether in the purchase or building of the property, or in a prior financial year), so the cash loss still occurred at some stage for this deduction to claimed.
So is negative gearing good or bad?
Those who see negative gearing as an amazing tax strategy often don't look at the outside picture and realise that with just that strategy alone you lose more than you gain, however, if you have a long term plan for the property that leads to increased wealth at the end - negative gearing can certainly be a good short-term strategy.
Information in this post is general in nature and does not make a recommendation on whether an individual should or should not negatively gear. We recommend speaking with a financial planner to seek more information regarding whether negative gearing is a good financial strategy for you. But for more information about the tax impact of negative gearing - please reach out to us at firstname.lastname@example.org or on 07 4334 0002.