When an investment is negatively geared it means that income from the investment is less than the costs of holding the investment.
Negatively gearing is commonly associated with property.A typical example is where an investor borrows to acquire the property meaning one of the most significant costs of holding the property are the financing costs.Where the total of the financing costs andother holding costs exceed the rental income, the investment property is negatively geared.
So why would you want to spend more than you earn? The answer should be that you expect the value of the property to increase over time at a rate greater than the accumulated losses from negative gearing.
The good news is that the losses from negative gearing can also bring tax benefits as in most casesthe loss can be used to reduce taxable income.The higher your marginal tax rate, the greater tax benefit you will receive.
Here’s an example:
Mary is a school teacher who purchased a property looking for long term capital growth. If the rental income is $20000 and expenses were $30000 (including depreciation, interest repayments, insurances, property management fees and maintenance costs) then there would be a loss of $10000. Assuming Mary’s marginal tax rate including medicare levy is 34.5% there would be a tax benefit of $3450.
More good news is that depreciationof the property and furniture, fixtures and fittingscan be claimed as a tax deduction where the property is income producing. Depreciation is a non-cash deduction, which means the property investordoesn’t spend money but can still reduce their taxable income. Often investors will pay for a Quantity Surveyor’s report to determine what deductions are available.
