A property is said to be negatively geared when it produces less income than the cost of maintaining it. These costs can involve the interest being paid on the loan for the property, maintenance, and council rates etc. It is an investment strategy for some people, as they can offset the loss from such properties against their income from other sources for tax purpose.
For example, suppose you own a property which produces $2,000 in rental income per month. The expenses on the property (interest, maintenance, etc.) are $2,500 a month. That is a loss of $500 a month of $6,000 a year. In many cases, you can deduct this loss (or part of it) against other income you have had in the year when filing your tax return.
What expenses on my property can I claim?
For an investment property, the owner can generally claim a deduction for your expenses associated with the management and maintenance of the property, including the interest you pay the loan for the property. Some examples are:
– Interest on the loan
– Ongoing maintenance expenses, property management fees, council rates, body corporate fees, landlord insurance
– Depreciation on appliances used in the property, such as a dishwasher, refrigerator and oven
– For some buildings, you may also be entitled to claim depreciation of building works
What are the Cons?
Most people who opt for negative gearing expect the price of the property to rise in the long term. If this assumption does not hold, then there is a risk of incurring a significant loss on the property over time. This is the main risk associated with pursuing negative gearing as an investment strategy. To manage the risk, make sure you do your research thoroughly and opt for a property which has a good chance of rising in value over time. Also, make sure you can afford to pay the interest repayments and maintain your investment property. You may also want to consider having mortgage insurance in place on your investment loan to provide additonal protection, especially in a risky market.
Is Negative Gearing Going Away?
There has been talk about the impact of negative gearing on house prices in Australia and there have been calls to abolish it altogether. Some people claim that negative gearing favours the rich (more than 50% of the benefit goes to individuals with income more than $100,000) and inflates house prices. Others claim that most people benefiting from negative gearing are middle to lower income earners and hence it helps Australians in becoming financially independent. However, the debate is rife and negative gearing might see some changes especially in case of a change in the political landscape.
For some more stats on who uses negative gearing click here.