Understanding Negative Gearing: Not Just for Bricks and Mortar

Negative gearing is a common term in Australia, particularly for property investors. But what exactly does it mean, and is it relevant for everyone?

In simple terms, negative gearing occurs when the expenses associated with an investment outweigh the income it generates. In the context of property, this means your rental income doesn’t cover your mortgage interest, council rates, and other costs. This creates a net loss.

However, the key point is that this loss can be offset against your other taxable income, like your salary. This reduces your overall tax bill for the year.

Here’s the catch: Negative gearing is a strategy for the long game. It relies on the assumption that your investment, be it property or shares, will appreciate in value over time (capital growth). While the negative cash flow continues in the short term, the hope is that the eventual sale of the asset will yield a profit that outweighs the accumulated losses.

It’s Not Just Property

While negative gearing is often associated with property investment, it’s important to remember it can apply to shares and managed funds as well. If the interest on a home equity loan used to invest in a share portfolio exceeds the dividend income, you may also be able to claim the difference as a tax deduction.

Before You Gear Up

Negative gearing at the right time can be a powerful tool, but it comes with inherent risks. Remember, it assumes asset prices will rise. There’s no guarantee of this, and market downturns can significantly impact your strategy depending on the type of debt facility that you hold. Additionally, ongoing holding costs and unexpected expenses (e.g. interest rate rises) can strain your finances.

Consulting a professional is crucial before diving into borrowing for investment. They can assess your financial situation, risk tolerance, and investment goals to determine if this strategy aligns with your plan. Taking on debt for investment can be a powerful strategy, but many people don’t realise that they may actually be in a position where they don’t need to take on this debt risk in the first place to achieve all of their goals. 

Remember: Negative gearing is a long-term strategy. Be prepared for potential cash flow shortfalls and ensure you have a buffer to navigate unexpected situations.