Negative gearing – a term you hear a lot in investor circles, but what exactly does it mean?
Negative gearing is when the ongoing costs of an investment are more than its return. In property terms, this means the cost of repaying your loan and maintaining your property is higher than the rental income it provides you, so you end up with a loss.
Sounds counterintuitive right?
It’s actually quite clever! Making short-term losses on property can be attractive for investors because of its tax advantages, as well as the potential for a long-term capital gain (profit from sale) that greatly exceeds the combined losses.
Essentially, an investor who successfully manages a negatively geared property will be using money they would have otherwise paid as tax dollars, to pay for the costs of their investment.
Of course, the risk is that your long-term capital growth never offsets your short-term cash losses, so choosing the right property is essential. For advice selecting the right location for investment, be sure to read our new article, Picking locations by the numbers.
Australian law allows investors to deduct expenses related to their investment properties against their taxable income.
You can claim the following expenses against your investment property:
- Advertising for tenants, agent’s fees and commission.
- Interest payments and loan fees.
- Council rates, land tax and strata fees.
- Depreciation of items such as stoves, fridges and furniture (rules apply)
- Repairs, maintenance, pest control and gardening.
- Building and landlord’s insurance.
- Stationery, phone costs and reasonable travel to inspect the property.
To claim on these expenses, you’ll need to keep bank statements and receipts as evidence as well as depreciation and capital works schedules. Getting a Quantity Survey done is also a great idea and will easily give you greater deductions than the cost of the schedule itself.
Remember, this is just one investment strategy, and whether it’s the best one for you will depend on your personal circumstances. Many financial planners aren’t able to give advice on investment property purchases, so speak to your Nectar broker about who they can put you in contact with, and what your best borrowing strategy may be.