Insights on Tax
Negatives of Negative Gearing
Negative gearing in the rental property market is very popular with such a broad range of Australians.
From those starting out in the property market to mums and dads, it seems so many people think generating a tax loss from having a property is a great idea.
But is it really??
The concept of negative gearing is that the costs of having a rental property (like interest, agent commission, council rates, repairs, etc) are greater than the income received, giving a loss which can be claimed against other income for tax and therefore you get a tax refund.
And everyone loves a refund!!
Unfortunately, people forget that this is actually costing them money. They have to put money in from their own pockets to "generate" the loss. And at best they get back less than half what they put in via tax refunds.
So why do it?
People are banking on the value of the property increasing by more than what theyre losing, so these losses are recouped when the property is sold. After capital gains tax is paid though. It can be a hopeful strategy.
Ask yourself this question - how many negative geared properties could you afford, giving you have to tip cash in? 1, 2, 3, 4??
Now think of this. If you had properties that were POSITIVELY geared, where you make profits and have to pay a little tax, how many could you afford? Its not a trick question. If theyre paying for themselves then the number is as many as you want. Yes, you pay some tax but you keep more than half of every $ the property earns.
Dont be blinkered by tax when it comes to property. Negative gearing can be negative.
Please note this is not financial or investment advice. This post is merely a personal view of the income tax merits of a particular investment. You should always consult a licensed financial advisor before making investment decisions.