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To gear or not to gear?

Is negative gearing really a good investment strategy?

The question is often asked by property investors, many of whom do not fully understand the meaning and implications of negative gearing.

In a nutshell, the answer is that it is really more a tax strategy.

Basically, negative gearing occurs where the costs of renting out an investment property outweigh the rental returns that are received from the rental of that property.

The cost of the loan (i.e. interest on mortgage repayments and stamp duty etc.) is taken into account when calculating whether the investment is running at a loss. Some of the other costs of running a rental property that can be used to negatively gear a rental property include body corporate fees, building depreciation, cleaning costs, council rates, insurance costs, land tax, repairs, maintenance and water bills.

If the investment is shown to be running at a loss, the Australian Taxation Office allows investors to offset this loss against their income tax assessment.

This means that negative gearing on a rental property can be more of a tax strategy than an investment strategy. While it can help property investors to reduce their taxable income in the short to medium term, it should not be considered the main reason for investing in any property.

There are, of course, obvious tax advantages to the negative gearing of a rental property. But the purpose of investing, after all, is to receive a positive cash flow and to make a profit. Over the longer term at least, you should be aiming to make a profit from your rental returns rather than a loss.

By making a loss in order to negatively gear your investment property, you may be relying too much on making a huge profit when it comes time to sell your property at some point in the future.

Source: Harris Partners Property News.

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