Negative Gearing as Part of a Broader Investment Strategy

Before deciding that a negatively geared investment is proper for you, there are some important questions you, in consultation with your financial adviser, should consider:

?Will this investment move me closer to my long-term financial goals?
?What is my objective? Specifically, what do I you want to achieve with this investment?
?Will this investment make money, or reduce tax?
?What conditions must exist for me to make money from this investment?
?What annual cash flow or outflow will this investment generate?
?If the investment is negatively geared, can I afford the loss and manage cash flow shortages?
?What is my exit strategy if things go wrong?
?Have I checked all my calculations carefully, and sought professional advice to verify that my plan is sound and my profit estimates are valid?

It is important to consider unrealised gains in situations where cash flow is critical. For example, if you are planning to live on the earnings from your investment property for a time, and have no other income, you might need to sacrifice long-term profits to preserve short-term cash flow. You could budget to borrow against unrealised gains to meet living costs, but you would then need to carefully consider the interest on that additional loan.

Calculating depreciation benefits and tax savings and estimating rent, expense and property value increases can be difficult. There are negative gearing calculators on some web sites, but wise investors will consult a financial adviser with expertise and experience. As you see from the examples, choosing the right investment strategy can make a huge difference to your total profits!

An adviser can also help you understand likely changes in tax law and how they may impact on you. Currently, the Australian Taxation Office calculates capital gains tax by applying your top marginal tax rate to 50% of your gain, if you have held the property for more than 12 months, after deducting buying and selling costs. However, if you invest through a superannuation fund, different rules apply. Capital gains tax might not apply at all.

An adviser may also be able to help you create structures that allow you to divide gains among family members with little or no income, so less or no tax applies. If you earn income through a family trust, for example, you may be able to time your sale to coincide with the year your wife takes off work to have a baby, and divide the gain between her and your children. Expert advice might save you tens of thousands of tax dollars!