Negative Gearing

Negative gearing is the term used when where the costs attached to making an investment like residential or commercial property or shares are greater than the annual returns. These losses may result in a big refund each year, an advantage when it comes to your tax return. However, you need to consult experts before jumping in, as there are two possible downsides:

• You must be able to afford the actual annual cash losses.
• You need to pick an investment that is likely to grow in value and make the whole investment worthwhile.

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ADVANTAGES OF NEGATIVE GEARING

There are several reasons to invest knowing you'll make an annual loss:

• To secure a retirement income stream when the loans are paid off.
• To eventually make a capital gain on sale when the investment has grown in value.
• To deliberately maximise short-term tax refunds.

HOW DOES NEGATIVE GEARING WORK?

The idea is to borrow from banks and other institutions to buy the investment. As you will be reporting returns as income, the costs associated with taking out the loan and the interest you pay will be tax deductible.

Property

• As an individual or property investor, you might make a direct purchase of investment property, such as residential homes and units, or commercial property.
• As a business, you might purchase the premises from which you operate.

In addition to interest paid on your mortgage, you can claim other holding costs like rates, levies, repairs, insurances, depreciation and capital allowances. Often these exceed rental or leasing income received. That is what is meant by negatively geared.

Shares

It is also possible to directly purchase shares and managed trusts. This is often called leveraging.

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