Your Guide To Negative Gearing In 2021

If you’re a property investor, it’s important to know the ins and outs of negative gearing – a strategy used by many property investors.

It’s estimated around half of landlords have negatively-geared properties.

Here, we’ll look at what gearing means, how it works and what the future might hold.

What is negative gearing?

Gearing a property basically means borrowing money in order to invest. There are three ways to ‘gear’ a property – negative gearing, positive gearing and neutral gearing.

A neutrally-geared property means the cost of borrowing, and the expenses required to maintain the property you buy, equals the amount of income it generates. We’ll go into negative and positive gearing below.

How does negative gearing work?

Perhaps you have an investment property, and it’s operating at a loss. This means the rent your tenants pay is lower than your interest repayments, and the money you spend to insure and maintain the property. This means your property is ‘negatively geared’.

While operating at a loss doesn’t sound great, the benefit of a negatively geared property is that you can deduct any losses from your taxable income (such as salary / wages from your day job). This reduces the amount of tax you pay.

In the meantime, your investment property is hopefully going up in value, which could lead to long-term capital growth and a healthy profit if you sell in a booming market.

Positively geared vs negatively geared

A positively geared property is when the rental income exceeds the expenses. These out-goings might include maintenance, fees to a property manager or council rates. That means you’re making money on your investment.

The benefit of your property being positively geared means you have a surplus, and you can either put that towards reducing your existing home loan, or investing in another property, if your goal is to grow your portfolio.

Should you negatively gear your investment property?

You may want to consider negative gearing if you earn a decent income, are in a high tax bracket, can afford the repayments and have the ability to pay for any required outgoings while you wait for the property value to rise.

Plus, if you negatively-gear your property and the market is strong (like the one we’re currently in), you’ll still benefit from long-term capital growth.

When shouldn’t you negatively gear a property?

If you’re on a strict budget or stretched financially, negative gearing might not be a good idea. You may also wish to reconsider if your goal is to build a property portfolio and you want to ensure you have enough disposable income to do that.

Plus, if you’re at a stage of life where you’re looking to build financial freedom, or want the income from the rental property, positively gearing your investment property may be a better option.

Negative gearing: the future

Labor had planned several tax reforms around negative gearing if they won the 2019 election, including a plan to restrict the policy to new homes only.

They also wanted to reduce the capital gains tax discount – which enables investors to flip properties at a profit and save on tax – from 50 percent to 25 percent.

However, the current Labor leader Anthony Albanese recently announced that the party would not be pushing forward with these policies ahead of the federal election.

So for now, negative gearing and the current policies in place seem here to stay.

Conclusion

Whether you choose to negatively gear your investment property or not, it’s always a good idea to get advice from a financial planner and your accountant, to ensure you’re making the right decision for your personal circumstances.

Want more information about negative gearing in the current market? Feel free to drop us a line or give us a call anytime.