With the property boom over the last decade, the catch phase everyone takes about is Negative Gearing. Negatively geared properties can be your friend or your enemy – and it’s important to know the difference.
A negatively geared property is one where the rental income doesn’t cover the expenses to hold the property – that is the interest, rates, body corporate, insurance, agent fees and maintenance/repairs. If you have a negatively geared property, the shortfall generally ends up being a tax deduction for you (saving you some tax).
This typically is the positive spin many people put on their negatively geared property – I SAVE TAX!
But what you need to remember is that for every $1 spent on negative gearing, you only get your marginal tax back (typically between 32-37%). So you’re still out of pocket even after the extra tax refund.
When negatively geared property becomes your friend is when you can see Capital Growth in the property. So it may be costing you $3000 a year (after tax refunds) to hold the property, but the value is going up by $5000 or more a year. Or if you think the market will boom in the next 5-10 year it’s worth holding it for a while.
When negatively geared property becomes your enemy is when there’s no Capital Growth, or no sign of market growth in the future. The property is costing you $3000 a year to keep, when you could be investing the $3000 into a high interest bank account – maybe returning 3%, earning you $900 a year.
So whilst negative gearing can work for some – the important factor is the property and it’s potential.