Negative gearing is a hot topic in Australia today. Many say it’s a tool advantageous for rich real estate moguls to hoard properties and artificially raise property prices.
This is not true.
Anyone can borrow money to buy a property and benefit from negative gearing. If you’re planning to buy a property and use rent income to pay for its maintenance, it pays to know about the pros and cons of negative gearing.
- Capital Growth
Negative gearing gives you the opportunity to acquire properties in different high capital growth areas across Australia. Provided you have regular tenants, you can own the property despite your losses and offset your income.
- Tax Savings
Over time, your taxable property income will begin exceeding tax deductions as the markets fluctuate. Until then, you will benefit from huge tax savings. Here’s how it works:
Let’s assume you have a property renting for A$380 weekly with tenants all year round, which means you have an annual profit of A$19,760. However, your overall expenses are at $30,000, giving you a total net rental loss of A$10,240.
Now, if you have a net taxable income of A$75,000 for that property, your rental loss might be A$10,240 multiplied by 0.30 – or 30%. That’s A$3,072 that will contribute towards all your expenses. Remember, you can claim any expense related to your property.
- Developmental Opportunities
Positive cash flow, the direct counterpart of negative gearing, limits your opportunities for buying a development asset with huge potential. These development assets have a high potential to grow in value in the future.
If the markets turn positive, you can convert one property into multiple properties for better income prospects.
- No Income (At First)
As with any business, you’re going to rely on tax deductions and your personal income to offset the expenses of your negatively geared properties. When the market improves your property’s value, you can turn your property into one with a positive cash flow.
Therefore, it pays to diversify and place your eggs in different baskets just like you would with any other type of investment.
- Prevents Growing Your Real Estate Portfolio
Remember, you’re still paying for all the properties you purchased through negative gearing. Insufficient capital will limit your portfolio development regardless of negative gearing or positive cash flow.
- Higher Risk Due to Market Reliance
If the real estate market improves in any area inclusive of your property, then congratulations, you can remove your tax-deduction reliance and move the property into positive cash flow status. Unfortunately, you won’t make any money until the market improves, and that can take a while.
Knowing more about the pros and cons of negative gearing will help you make the right decision with your real estate investments.