When you borrow money to purchase an asset, it is called gearing. The government has special gearing laws that impact the investments made in the real estate market, ultimately affecting the number of homes available to people. Although it can be used for other assets, negative gearing is used primarily in the real estate market context.
The income you earn from your real estate investment can be positively or negatively geared, depending upon its use. Hence, it is crucial to have a solid understanding of negative gearing investment property if you’re an investor considering real estate as your next target.
What Does Negative Gearing Mean?
Naturally, the first question that arises in everyone’s mind is what negative gearing is. So, negative gearing refers to a situation in which the income generated from real estate in the form of rent is less than the expenses going into it, resulting in a loss. As we all know, the primary purpose behind buying real estate is to increase one’s wealth, so a loss is never welcome.
The Australian Tax System allows real estate investors to deduct their loss from the taxable income they sustain due to their real estate investments. That makes negative gearing rental property so attractive to many and often increases its supply.
How does Negative Gearing Work in Australia?
The following negative gearing examples can help you understand the process perfectly:
For instance, if you invest in a property that generates $15,000 a year in rent but its expenses are $20,000, you are $5,000 short. The costs mentioned here are usually mortgages, agent fees, maintenance bills, etc.
If your total income is $100,000 and the negative gearing shortfall is $5,000, you can deduct it from your taxable income. As a result, your net income will now be $95,000, and you’ll have to pay less income tax. It is how negative gearing tax benefits boost your finances and keep the supply of rental properties positive.
Differences Between Negative Gearing & Positive Gearing
Negative gearing means that the property is making you a loss every year because the expenses outpace the earnings. You must spend money from your pocket to maintain a negatively geared property.
Conversely, a positively geared property earns you a profit each year because its rental income is more than the expenses to maintain it. However, unlike the negatively geared property, you must pay tax on this income.
Benefits of Negative Gearing
Buying a negatively geared investment property should always be the first choice. Because it brings you profits, opportunities, and tax savings. There are many more benefits but let’s learn some major benefits of negative gearing in Australia.
1. Capital Growth
Most properties in Australia are negatively geared, so going this route will give you more options. So, if you research well, you can score a property in high capital growth areas. Although positively geared properties can also be profitable, they’re limited in numbers and much harder to find.
On the other hand, you’ll find negatively geared properties all over Australia. Earning money through capital growth will help you cover your losses easily.
2. High Depreciation
Another often overlooked advantage of negative gearing is high depreciation. You can search for properties with high depreciation and depreciate the building and all its internal fixtures. It will provide you with a tax break that you can claim against your income, equivalent to getting a tax refund.
However, ensure you have an experienced surveyor before you buy a property for depreciation. Also, discuss with your accountant the extent to which you can claim a refund.
3. Tax Savings
Another benefit of investing in negatively geared properties is that you can recoup your losses from your job. Every dollar you lost on the property can be claimed as a loss. However, consulting a taxation professional to understand everything is always advised.
4. Development Opportunities
Negative gearing rental property allows you to develop or convert one property into multiple properties, which is unlikely to happen with positive gearing. Having multiple properties gives you a better rate of return when compared to a singular property bought through positive gearing.
5. Safe & Secure Areas
As negatively geared properties are often found in areas with amenities and facilities, they’re usually safe and secure with lower crime rates. More people will likely rent your property if the neighborhood is safe, and you’ll earn more bucks.
Disadvantages of Negative Gearing
While negative gearing is fruitful, there are some disadvantages also. Some of them are highlighted below:
1. Restricted Cash Flow
Negative gearing investment property is beneficial only if you have a lot of spare cash. Otherwise, it is highly likely to suck your cash flow because you must bear all the maintenance expenses to keep everything running.
2. Lack of Serviceability
One overlooked disadvantage of negative gearing investment property is that you become limited in the number of properties you own. That’s because you’re bearing all the expenses, making it impossible to maintain too many properties. Maintaining a few properties while earning $ 1 million a year is practical, but doing it with $100,000 yearly is almost impossible.
How Can You Minimize the Risks of Negative Gearing?
Anything, including negative gearing rental property, can be risky if you don’t play wisely. Therefore, keep the following aspects in mind when going for it:
1. Choose Wisely
The first thing to do is to buy a property near major amenities and facilities. It ensures that your property stays occupied for a short time and appeals to most people.
2. Be a Good Money Manager
A negative gearing investment property can sometimes cost you much money, resulting in financial distress. Sometimes you do not have any tenants coming in, so you need a property developer. On other occasions, you might have to bear many maintenance expenses. So, before you go for negative gearing rental property, make sure you have enough money in the bank to cover all expenses that come with it.
3. Insure & Protect
Getting your negative gearing rental property insured as quickly as possible is crucial as an investor. It is always welcome to be prepared for the worst-case scenarios. Speaking to your mortgage broker or financial adviser can give you a good idea about property insurance that is best suited to you.
The Hawks Group Can Better Guide You About the Negative Gearing
So, this is everything you need to know about negative gearing rental property in Australia. The Hawks Group are at your service if you’re looking for negatively geared properties in Australia. We are premium property managers with comprehensive resources for buyers, sellers, renters, and developers.
Hawks Group empowers its clients through helpful knowledge, the latest data, and immense support. So, what are you waiting for? Get in touch with us today and begin your real estate journey!
