A property investment is negatively geared if the monthly or yearly costs or expenses are more than the rent.
What are the benefits?
There are two main benefits of negative gearing.
1. If you are willing to buy a negatively-geared property, you can spend more on your asset.
By borrowing substantially, you have more to invest in your property. This is important if you want to buy a property for high capital gains, but perhaps lower yields. This way, you can diversify your portfolio – especially if the rest of your properties are likely to bring in high yields with lower capital gains.
2. There are tax advantages.
The investment technically makes a loss, and so the expenses (or at least some of them) may be used as tax deduction. As the ATO (Australian Tax Office) states: “If your property is negatively geared – that is, you borrowed money to buy the property and your net rental income after other expenses is less than the interest on the loan – you may be able to claim the full amount of rental expenses against your other income, such as salary and wages.”
If your property earns, for example, $5,000 per year in rent and the expenses (for example, insurance, rates, and repairs and interest) are $6,600, you can claim $1,600 against your income at tax time.
Other deductions can include:
- Interest charged on your loan for your investment property.
- Building depreciation. The ATO produces a publication about rental properties with lists of items that can be claimed along with depreciation percentages.
We can help you find a great tax professional who can help you with the ins and outs of tax for investment properties.
Are there risks?
There certainly are risks:
1. Negatively-geared properties usually expose you to greater risk during falling markets.
So… Make sure you are buying for the long term. You need to be able to ride out the rises and falls in the property market. If you think you’ll need to sell quickly at any time over the next few years, this is probably not the investment type for you.
2. Because the borrowing costs are higher than the income, you’ll need to make up the shortfall.
So… Before you buy the property, you should make sure you’ll be able to meet these costs over the long term (even if interest rates rise, you are temporarily unemployed, or the property is left vacant for a period). We can help you figure this out. Insurance is also a very good idea.
If you have the appetite for the risk, negatively geared properties can be great assets to add to your portfolio. They’re certainly not for everyone, though. We’re always happy to have a chat if you’d like to talk more about any of the information in our blog posts.