Australia has around 2.6 million property investors and almost 60 per cent of them use negative gearing.
So how does it work?
An investment property can either be positively or negatively geared.
If the property is positively geared, the rental income from the home covers all the costs of owning the property, such as loan repayments, maintenance and property management fees. That means the owner makes money from the home and usually pays tax on the income earned.
In contrast, the owners of negatively geared investment properties are losing money on the property. That means the costs of owning the property, including, loan payments, maintenance, etc, exceeds the income received from the property. In Australia, this loss amount can be offset against the owner's taxable income.
For example, if your investment property made a loss of $10,000 and your income was $80,000, then your taxable income would reduce to $70,000. In some cases, the loss even drops investors into a lower tax bracket.
Negative gearing has been popular with property investors in Australia, with around 60% of property investors using negative gearing and claiming a loss of over $8,700 each, on average.
Of course, you have to have the surplus cash flow or other income to fund the losses, which is why it’s a strategy often best suited to high income earners.
It’s also often considered a ‘long term play’ as losses experienced today are expected to be offset by capital growth in the property over a period time.
This article is for general information only. If you’re considering buying or investing in a property, it’s advisable to get professional financial advice.