Determining the Viability of Negative Gearing

The key considerations when considering a negative gearing investment strategy should be:
?Does the asset promise strong capital growth over the planned investment term?
?Is the tax benefit adequate to cancel out any short-term cash losses?
?If the tax benefit is less than the short-term cash losses, can I comfortably afford to cover the balance of cash losses from other income or savings?

Because tax benefits can be critical to the viability of a negatively geared investment plan, negatively geared investments may be more appealing to higher income earners.

When calculating the income tax benefits of a negatively geared investment, it is important to understand the effect of income tax rates. A decade ago, if you invested in negatively geared property and your income was $80,000 yearly, the 'tax man' might have subsidised your losses at the rate of 48.5c in the dollar, leaving you to fund only 51.5c of each dollar lost.

Many years ago, much higher tax rates meant that some investors received tax benefits as high as 80c in the dollar. Today, most taxpayers will enjoy a tax saving of only 30c in the dollar. As tax rates continue to fall, negatively geared investments may become less attractive.

With careful planning, though, even a relatively small tax saving can significantly impact on total profits.

Always remember: the objective of a negatively geared investment should never be to save tax. If you are saving tax in this manner, you are, by definition, losing money! Your goal should always be to make maximum after tax profits.