Here at 5 Star roofing we take a genuine interest in how to get started with acquiring a property. One of the things that comes up is what is a negatively geared property. Here we take a little look at exactly that.
If you are looking to invest in property, you may have come across the term negative gearing. It is important that you know what negative gearing is and how it will affect your property investment. This is not a strategy that all investors should look at which is why you need to know the basics.
What Is Negative Gearing?
Negative gearing will occur when an investment property has a net rental income of less than the interest charged on the borrowed funds used to purchase the property. Negatively geared property will have a net rental loss. This means that the rental income you have at the end of the year will not be enough to cover all of the expenses you incur purchasing and maintaining the property.
When looking at this, you might think that there is no benefit to negative gearing. However, the primary benefit of this is the fact that you can offset this loss against the income you make from other sources. This will result in you having less income to declare at the end of the tax year which means you pay less tax. You will also still be able to make a long-term profit on your rental property investment should the value of the property increase.
The Benefits Of Negative Gearing
There are a few benefits of negative geared property that you need to know about. The reduction in your taxable income will be the primary benefit as you will not have to pay as much tax. You will also still have your long-term investment gains. Negative gearing is considered a sound strategy for many investors who carefully choose their investment properties.
The Drawbacks Of Negative Gearing
While there are many benefits to negative gearing, you also need to be aware of the drawbacks. The risk involved in borrowing funds for an investment should be considered as the rising interest rates could cause problems. Negative gearing is also not good for the economy as it encourages people to borrow more money than they can afford and will push up the prices of property.
The property market will also be affected by large-scale negative gearing by investors. The price of existing houses will increase and little will be done to generate a new housing supply. Negative gearing will also favor people with a large income as they will benefit the most from the reduced taxable income. First-time buyers and low-income earners will not benefit from this and will often have a hard time getting into the market when negative gearing is rampant
Thank you to the team at Property Investment Newcastle for the article