A property is said to be negatively geared when the interest on borrowed amount is greater than the net rental income. As a result, a net rental loss arises from a negatively geared property. You may borrow money for buying a property, renovate it and cover several maintenance costs only to discover that the annual rental income the property has generated for you is less than what you incurred in expenses.
This looks bad, but you can take advantage of the loss you incur by offsetting it against the income that you are generating from other sources. So you’ll earn less income from your investment property and thereby will be paying less tax at the end of the year. While negative gearing is popularly used with an investment property, you can also use it for other financial investments like bonds and shares.
Generally, a deduction for the expenses associated with the maintenance and management of a property can be claimed including the interest paid on loans. If your property is negatively geared, you might be able to deduct the entire amount of rental expenses against your salary, wages, rental income, and other income.
You might also be able to claim depreciation against the rental income of your property. Generally, deductions are claimed in three major categories. These include:
Larger items in a rental property depreciate over time and you can claim deductions over them.
Revenue deductions can be claimed by property investors. For example, you may claim deductions for the interest on a loan and ongoing maintenance charges.
Building allowances can be claimed by property investors. For example, you might claim deductions for building works or depreciation over time.
A detailed list of expenses that are deductible in an investment property can be found on the ATO website.
Negative gearing, like any other investment strategy, comes with its own set of risks. Borrowing money for making an investment is in itself risky and you should know everything that is involved in negative gearing before you implement this strategy. Some important risks you must consider before pursuing the negative gearing investment strategy include:
There are certain steps you can take for minimizing the risks involved in negative gearing. For example, when you are thinking about using negative gearing, you should do plenty of research before choosing your property and select an investment property that’s more likely to increase in value in the future.
Also, make sure that your income is sufficient to cover loan repayments and maintain your property in all circumstances. Before you pursue negative gearing, speak to a financial planner as they can help you determine whether this investment strategy is right for you or not.
Negative gearing has remained a popular investment strategy for the investors of our country for several years now. But some critics have argued that although negative gearing encourages property investment, it reduces the number of available homes for buyers and increases prices. Negative gearing benefits rich investors over home buyers allowing the rich to get richer. Not only that, but this investment strategy encourages risky property investments.
Those in favor of negative gearing argue that negative gearing provides moderate benefits to investors and many of the property investors who benefit from it are on moderate incomes. Moreover, this investment strategy encourages property investments and promotes housing constructions. Proponents also claim that removing negative gearing could raise rents and hurt property prices in Australia by lowering investment.
In a nutshell, negative gearing is a popular investment strategy that you can use with your property investments. However, before you pursue it carefully assess the benefits and risk involved.
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