We’ve talked before about if negative gearing is the right strategy for you. Today, we’re discussing how you can use negative gearing as an investment property strategy to benefit from a tax break when you decide to purchase a negatively-geared property.
Negatively geared properties mean that your running costs are greater than your investment income. Therefore, you as a property investor is making a cash loss on your investment. However, the goal of investors obtaining negatively geared properties is to benefit from getting into the market early and over time, transitioning to using investment properties as a source of income.
Another major reason why investors take the route of investing in negatively geared properties is due to tax savings. I mean, if you have a huge disposable income, why not? If you decide to buy a negatively geared house and your income, for example, is $100,000, and your property collects $40,000 per year in rent but costs $50,000 per year in interests and running costs, your loss on the property would be $10,000. This will then reduce your taxable income from $100,000 to $90,000 and saves you 30% tax on that reduction, being $3,000. In essence, your after-tax loss is cushioned by the tax reduction you receive.
So what’s the whole point of buying a negatively geared house, when you save on tax but you’re still losing money? Well, more than just saving you on tax, the reason why investors use this strategy is that the growth in the property outweighs the holding costs. It can offer long-term success through capital growth as the value of their investment increases over time. And when investors decide to sell an investment property, they still have to pay capital gains tax on the profit from the sale. However, the tax benefits enable them to hold more investment properties with little effect on their lifestyle. If efficiently used, tax deductions can be used for advertising, insurance, capital works, council rate, repair, maintenance, interest on loans, and many other expenses associated with owning an investment.
While most investors rely on the capital gain to make a profit, others opt to hold their properties for the long-term until it becomes a positively geared property. When the rent increases over time and the loan amount remains the same, the rent income will more likely become greater than the holding costs of the property.
You as an investor should take into consideration your strategy and financial capacity to achieve your investment goals. You should look into whether or not you have the financial means to cover the losses for the entire period that you plan to negatively gear. When you do your research and work with a trusted team of experts, you’re able to maximise your borrowing capacity, evaluate the performance of your investment, make a financial profit, and diversify your portfolio. If you think negative gearing is a viable strategy for you, consider getting a broker to help you with your strategy.
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