Negative gearing on investment properties is one of the most popular ways that Australians reduce their income tax, but how does it work?
Negative gearing means buying property or other assets using debt. The interest charges on the loan exceeds the rent that an owner gets for their property. That is, they incur an annual loss. That loss is then deducted from the owner’s annual income.
Negative gearing is not without risk, especially if an owner pays too much and if the value of the property declines during ownership.
So why do owners choose to invest this way?
Owners choose to do this because they can make money not only from saving on income tax but also because they can profit down the track as the appreciation of the property’s value increases at a higher rate than inflation. This comes in handy when the owner decides to sell the property.
This is especially true when the owner sells the property for a higher price than what they paid for the property themselves.
Of course, owners have to take into account that the money they borrowed must be repaid.