An Introduction to Negative Gearing

There has been a lot of hype around ?negative gearing? as a wealth-building strategy. It is often touted as a way to build a portfolio with no money of your own. Some may suggest it as a way to reduce your income tax. So what is negative gearing, exactly? Does it work? If so, how? Is it a suitable strategy for you?

Defined literally, it means structuring an investment to return short-term investment losses, but long-term gain. The term is popularly used to refer to investing at a loss to reduce income tax on income from other sources.

Because it can facilitate considerable tax savings, negative gearing can be an excellent wealth building strategy for high income earners. For many, buying an investment property is an appealing step along the wealth creation trail. An investment property is like a business. You rent or lease your property to someone to produce income. That income is assessable for income tax. You pay rates and taxes and expenses to maintain the property, and those costs are tax-deductible.

Few people set up a business using entirely their own money, and banks are happy to lend for investment in property because the loan is well secured. If you borrow to buy your property, the interest on the loan is tax-deductible. If the total of all rates and taxes, costs of maintaining your property, and interest on the loan is greater than the income you receive from the property, the investment is negatively geared. You can claim the loss as a deduction against taxable income from other sources.

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