What is Negative Gearing?
Are you planning to start investing or do you wish to invest in more assets?
However you have a lack of funds. Negative gearing could be the answer to your problem.
Negative gearing can also be a strategic option for you even though you have a surplus of funds. Negative gearing is where you borrow money to make an investment, but the costs of that investment is greater than the income you receive from the investment itself. The big advantage of this is TAX BENEFITS!
Negative gearing is a situation where you borrow money to make an investment (eg. Property, shares, bonds etc), but the ongoing costs of that investment are greater than the income the investment pays out itself (eg. Rent, dividends, interest etc). For example the cost of borrowing $500,000 at a 6% interest rate is $30,000 per annum. If that borrowing was used to purchase a property worth $500,000 with rent of $500 per week, thats $26,000 per annum rent. So the negative gearing outcome is calculated as income of $26,000 less the cost of borrowing $30,000 which gives a negative cash flow of $4,000 per annum.
Ongoing costs of investments may include:
- Interest payable on loans
- Bank fees & charges
- Stamp duty on the mortgage
- Mortgage insurance
- Valuation fees
- Consultancy fees
- Maintenance costs & repairs
- Capital depreciation ( on items such as light fittings, building costs, carpet, kitchen, appliances)
- Council & water rates
- Inspection costs
- Travel to and from the investment
- Any other expense incurred in gaining income from the investment.
However it should be noted that only expenses incurred for the purpose of producing assessable income is deductible. For example if you borrowed money and 50% of the funds were used to purchase an investment property and the other 50% for personal use like holidays and lifestyle, only the 50% used to purchase an income producing asset (investment property) is tax deductible.