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Is negative gearing right for me?

December 20th, 2016

Some critics label it a tax break for rich people. Others see it as a way of helping ordinary Australians get a foothold on the property ladder.So how do you know if negative gearing is a useful strategy for securing your financial future?

In its simplest terms, negative gearing means enjoying a tax deduction on a loss you’ve made as a result of owning a rental property. If the cost of having your property exceeds the income you derive from it, you can report a loss to the tax department and enjoy a deduction on that loss.

For example, let’s say you borrowed $420,000 to buy an investment property. Your yearly interest payments might amount to $30,000. Additional costs for the likes of body corporate, landlord insurance and maintenance might add up to $7000, so your total outlay per year is $37,000. If the rent you earn on the property is only $20,000 a year, you can declare a $17,000 loss and enjoy a tax break.

As an additional bonus, if you buy cleverly, your investment property will increase in value, meaning when it comes time to sell it you’ll make a profit, minus any capital gains tax you have to pay.

It sounds like a foolproof plan, and for many Australians, enjoying an unprecedented run of low interest rates and housing price growth, it’s been a winner.

But it’s important to remember, a loss is still a loss. If your taxable income is high, your overall loss may be significantly reduced by your tax deduction, and with the addition of the capital gains on the property negative gearing may be a worthwhile option.

If your taxable income is low, you’re already paying a low tax rate, so the benefits are less pronounced, but you still have to carry the gap between your rental income and your outgoings on the property. If you’ve bought well, the property should still increase in value, but will that increase in value outweigh the costs you’ve had to pay for?

You should also ensure you’re in a position to cover any unexpected costs associated with owning a property, such as if a tenant fails to pay their rent, or if a pipe bursts and ruins the carpets.

Another factor to consider is the state of the property market. While it’s true many Australian cities have experienced enormous housing price growth, in other areas the growth has been much more modest. And with many experts predicting a downturn in the apartment market due to what some are calling a glut, particularly in Sydney, Melbourne and Brisbane, it’s another reason to be careful in your decision making.

Investing in property is a strategy that requires careful research of the market and your own financial situation – perhaps with the assistance of a financial adviser – before taking an expensive leap.

First Super commissioned The New Daily to research and write this article. The views expressed are of The New Daily.

This publication was issued by First Super Pty Ltd (ABN 42 053 498 472, AFSL 223988), as Trustee of the First Super superannuation fund (ABN 56 286 625 181). It does not consider your personal circumstances and may not be relied on as financial advice. Content was accurate at the date of issue, but may subsequently change.