- Posted 14 Dec
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As a new property investor, you’re probably wondering about the different types of strategies around successful property investments.
One strategy is called “negative gearing” and can be tricky to understand, particularly with all the myths flying around.
And while it can be a great option for building wealth, there is no magic formula to getting it right. There are plenty of pitfalls that property investors can fall into when using this strategy.
Understanding Misconceptions About Negative Gearing
#1: Negative gearing is the best way to make money
As the name implies, negative gearing is actually focused on losing money, not making it. If you’re property is negatively geared, it means that all its expenses (like rates, interest fees, maintenance costs and property management fees) incurred exceed the income generated from it.
In essence, for a property to be negatively geared, it has to be making a loss. Where it can be advantageous is the ability to claim tax deductions against these losses, but depending on what your tax rate is, this may only cover up to 49% of your expenses, the rest you’ll have to pay for regardless.
For a successful negatively geared property, you need capital growth. This growth needs to increase by more than what you paid for it and what your expenses are plus any potential capital gains tax. This might seem easy when property prices are booming, but they can also fall as well.
Tread carefully when looking at this strategy.
#2: Negative gearing will clear my tax bill
From a tax viewpoint, it might seem like negative gearing is the most effective option when interest rates are high and you can claim those as interest deductions. But, a big tax deduction means you’ve incurred a big loss, which also means you have to pay more out of your own pocket.
Another option to increase tax effectiveness for this strategy is accessing depreciation allowances. This allows you to write off the value of items that depreciate over time. This includes items like furniture, appliances and carpet. You could also claim capital works deductions if you’ve made any improvements to the property.
#3: Negative gearing is the only option
Believing that you have to negatively gear your investment property is not the case. With current interests rates being low, it’s now even more likely that you can buy properties without losing money. This means that you can access positive gearing strategies, where the rent from the property exceeds the expenses you incur. It starts to pay for itself and generate a low income.
Once you understand how negative gearing works, you can then make an informed decision about whether it’s right for you.
Always seek the guidance of a qualified professional who can help you determine what the best strategy is for your long-term goals.
If you require help in obtaining home loan finance to start your investment portfolio, contact the team at Australian Credit and Finance today.