Benefits of Negative Gearing

All good investment decisions need to factor in the applicable tax consequences that apply to the investment. For example, one of my clients was inquiring about renting out her home (converting her existing primary residence into an investment property). She wanted advise on any potential deductions available from having a negatively geared rental property and also the size of the net rental loss that could be offset against her other income.

Negatively gearing occurs when the deductible expenses associated with acquiring and owning an income–producing investment exceeds the income generated by that investment. It is usually attractive for growth assets such as property or shares as these investments provide higher income returns and capital gains that make it attractive to borrow funds to make the investments.

Rental properties can be very tax advantageous investments as the owners can claim annual building write-off deductions, without physically spending any money. These deductions are the ‘ideal’ deductions as they generate tax savings without any cash outflow on the part of the taxpayer. In contrast, the other rental deductions (including management fees, interest, rates, insurance, and repairs), generate tax deductions (which is great) but must actually be paid for (not so great).

Although negative gearing is an attractive investment strategy, it only financially makes sense if the capital gains generated from the investment, plus the tax savings generated, exceed the net cash-outflows (rental income less interest, rates, repairs, etc). In this low inflation environment many investors are now finding out this is not guaranteed and is not always the case.

Tanuja NairBy Tanuja Nair from Success Tax Professionals Banksia Grove