Negative Gearing Example

What Negative gearing is and how it works

Many speculate as to what negative gearing is. To individuals who are new to property investing, the expression might seem complicated. But it’s relatively simple, let me explain by way of a negative gearing example.

Negative gearing is where an investor borrows money to invest (that is the “gearing” element), but where the rental earnings obtained by the investment are less than the interest and other expenditures incurred by owning, maintaining and managing the investment; turning out in a loss (that is the “negative” piece).

The loss is tax deductible, thereby lowering the amount of tax the investor pays.

A Negative Gearing Example

Negative Gearing Explained

An individual borrows $400,000 to invest in a property.
This individual collects $20,000 in rent for the year, but pays out $24,000 in loan interest, $3,000 in rates and insurance, $1,200 in management fees and $800 in repairs.

The net loss would be $9,000, ($ 20,000 income less $29,000 expenses), which brings down his or her taxable income. So the real after tax loss is only $4,185 presuming a tax rate of 46.5%.

It’s crucial to keep in mind that you should never invest in anything just because of the tax break. Negative gearing after all means it’s costing you money, even after the tax deduction. So the investment has to bring in enough capital gain over time to offset what it has cost you to hold it.

The longer the property is possessed the more likely this is to happen, so negative gearing with a view to earn substantial capital gains should never be viewed as a short term strategy. In my point of view, negative gearing is only considered an investment strategy when using at least 10 yrs as a timeframe.

Capital Gains Tax Explained