Negative gearing has been a popular form of investment since 1987. Negative gearing is a tax concession available to investors offsetting the costs of borrowing. Negative gearing most commonly used for the purchase of property but also for the acquisition of shares and bonds.
Harry purchases a house for $400,000. He has a deposit of $75.000 and borrows a further $325.000. The interest on the loan, plus rates and all costs of upkeep added together less any rental obtained is tax deductible and will reduce his taxable income accordingly. Obviously, the higher your income the greater negative gearing benefit.
Residential property investors gain from using negative gearing. In Australia, investment in residential property is the most popular vehicle, but it does involve a loss. People are prepared to accept this situation because of the prospect of capital growth which was the object of their investment in the first place. Historically, carefully chosen property held for a decade or more has proven to be a most profitable venture.
There are things to consider when using negative gearing. Investors must be able to fund their losses while waiting for capital growth. Negative gearing in shares and bonds is called margin lending. It is more volatile and hazardous than property with capital losses being incurred if the market moves against the investor.
There are number of things you should remember about negative gearing: