Negative gearing is a popular approach to investing. There has been a lot of debate about whether it works or not.
This article will look at the benefits and how it works.
What is Negative Gearing?
Negative gearing is a term utilised by property investors and others that describes the practice of borrowing funds to buy an investment property, then spending more than the rent received regularly. The idea is that the investor will reduce the amount of income they pay tax on by offsetting losses against any other form of income they may have, most commonly their job or salary.
Australian law allows investors to deduct any losses they make on an investment property from their taxable income. By doing so, the tax paid on that investor’s taxable income is less than it otherwise would be. Effectively, allowing investors to have a “negative” amount of taxable income, which sounds like a good thing! This is the key benefit of negative gearing, which often leads to a hike in rental housing supply.
In Australia, investors often invest in property to reap negative gearing benefits.
However, it is essential to fully understand how negative gearing works to profit from the money you invest. It is important to note that investing in property is a long-term strategy. It shouldn’t be considered lightly as properties may not always increase in value over time as per expectations.
Advantages of Negative Gearing
One of Australia’s most common investment strategies is investing in negatively geared properties, especially with the current real estate boom that is taking place. It’s not uncommon for property investors to have a tax bill more significant than the pre-tax income they are receiving from their property. This strategy can be very beneficial if you know how to use it. Investors should take the time to fully understand the negative gearing strategy before making any decisions about investments.
So, here are some benefits of the Negative Gearing investment strategy.
Target high growth areas
Advantage number one of negative gearing is targeting high growth areas. Several Australian states offer incredible capital gains tax discounts, meaning you can potentially offset 100% of your rent with tax deductions. Negative gearing your property can therefore ensure you profit from your investment instead of just collecting rent, thanks to the tax deductions.
It means investing in top-end properties or even looking downstream in the market with good cash flow and long-term holding properties. Keep in mind that you must have it for at least 12 months when you invest in a property.
High demand from low rental fees
Property investors ensure negative income and keep their property negatively geared. They accept more lower-earning tenants in their property portfolios can be more selective and increase the likelihood of long-term tenancies. With property prices in Sydney, Melbourne, Brisbane, and Perth rising, many property investors choose to lower their asking rents to avoid vacancies and tenant churn.
Reduction in taxable income
Negatively geared properties are a fantastic investment for many Australians and New Zealanders. The tax benefits often make them attractive; however, the loss caused by a negatively geared property reduces an investor’s taxable income for each financial year. This tax offset benefits many investors. Especially those with high marginal tax rates or investors who want to capitalise on their investment while building their portfolios.
Leverage for greater returns
There is an opportunity to get more significant returns and expand your portfolio if you achieve the capital growth that you want.
In particular, when a property takes a rise in value, it may be possible to borrow against that increased value to use that as a deposit on another property and expand your portfolio without actually injecting any more cash into these investments.
Opportunity to add value instantly
Last but not the most negligible benefit is the opportunity to add value almost instantly via things. Such as like renovations or a bunch of distinct other ways to add value to a property.
By buying a negatively geared property that has been on the market for too long. Therefore you got a great deal. You might have the potential to enhance value on that property by doing some nitty-gritty. In this way you can make your property more attractive to your target market.
How does Negative Gearing work
By allowing property investors to take off any depreciation they make on their investment property from their taxable income. Negative gearing makes it feasible for a much more significant proportion of the population to buy an investment property. It can help reduce rental prices by increasing the amount of rental housing available on the market.
However, Property investors need a trustable cash flow to cover pre-tax borrowing costs and get enough income to repay their loan. Here, investors need to hold onto the property for a long time to enhance its value. So that profit is higher than the rental shortfall incurred during ownership.
Whether you’re looking to invest in a new property or ease your financial burdens, our professionals will help you make the right choice. Our outstanding mortgage advisors understand the process and are ready to assist you through the journey.
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