Many Australians view negative gearing an investment property as a tax-effective way to get ahead.
Negative gearing is not always the best investment strategy. Your individual circumstances will determine whether negative gearing is advisable. For many, it may pay to positively gear.
What is Gearing a Property?
Basically, it’s borrowing money to make an investment. That goes for any investment, but property is where the strategy is most commonly used.
If the rental returns from an investment property are less than the interest and outgoings you pay, you can offset this loss against your other assessable income. This is what’s called negative gearing.
In contrast, positive gearing is when the income from your investment is higher than the outgoings, and you make a profit. When this occurs, you may be liable for tax on the net income you receive, but you could still end up ahead.
While negative gearing may prove tax-effective, it depends on the after-tax capital gain ultimately outstripping your accumulated losses.
The Importance of Capital Gains
If your investment falls in value or doesn’t appreciate, then you will be out of pocket. Not only will you have lost money along the way, but you won’t have made up that loss through a capital gain when you sell.
That’s why you should never buy an investment property solely for tax breaks.
When it Pays to Think Positive
If you are retired and have most of your money in superannuation, negative gearing may not be so attractive. This is because all monies in your super are tax-free on withdrawal. And thanks to the Seniors and Pensioners Tax Offset (SAPTO), you may also earn up to $32,279 as a single or $57,948 as a couple outside super before being taxed.
It often makes more sense to negatively gear during your working years, with the aim of being in positive territory by the time you retire, so you can live off the income from your investment.
While buying the right property when you are working and paying reasonable amounts in tax may make negative gearing a good option, positive gearing may still be a better strategy.
Claiming Expenses
If you do negative gearing, it’s important to claim everything allowed and keep accurate records.
For investment property, this includes advertising for tenants, body corporate fees, gardening and lawn mowing, pest control and insurance, along with your interest payments.
If you want to know whether negative gearing is the right strategy for you, then call us to discuss.
