There are many reasons why investors borrow money to invest in bricks and mortar:

• a return on investment
• the fact you can see and touch it
• many think the value of property never goes down (this of course may not be the case)
• the ability to offset the costs of owning the property – including the interest paid on a loan – against assessable income makes it particularly attractive

While there are certain benefits associated with negative gearing, it isn’t without its pitfalls. Before committing to negatively gearing an investment property it is worth considering certain scenarios and possible outcomes:-

• What happens if your rental property is vacant at any time?
• What if interest rates rise very quickly?
• What if there is a down turn in property values?
• How will these scenarios affect your ability to service the investment loan?

Negative gearing is a practice whereby an investor borrows money to acquire an income-producing investment property, expecting the gross income generated by the investment, at least in the short-term, to be less than the cost of owning and managing the investment, including depreciation and interest charged on the loan, etc. This creates a tax loss, which can normally be offset against other income including your wage or salary, thereby provide a tax saving.

When the rent covers the cost of borrowing and holding costs, the investment becomes a positively geared property and the income generated might be subject to tax.

Many will say that it would be better to pay tax on a profit than take a loss and get a tax deduction for it. It must be remembered that the tax savings achieved are at your marginal tax rate – you are not getting a dollar for dollar reduction in your tax liability.

A tax deduction should never be the only reason for entering in a negatively geared investment. Investors should also have their focus on creating equity by accelerating payments to reduce their loan.

If you are interested in negative gearing we are able to assess your circumstances and assist you with your requirements. Negative gearing does not suit all investors and with political uncertainty as to its future, the decision becomes more difficult.

Don’t get caught-up in the hype – make an appointment to see if its suitable for you.