Negative gearing is a popular investment strategy used by many individuals to reduce their taxable income. It involves borrowing money to invest in an asset that generates an income lower than the cost of owning and maintaining it. The most common asset types that people use negative gearing for include property, shares, and managed funds.

The ATO allows taxpayers to claim deductions for the expenses incurred in holding a negatively geared investment property, such as interest on the loan, council rates, and property management fees. These deductions can be offset against the rental income generated by the property, thereby reducing the taxable income and the amount of tax paid by the taxpayer.

However, negative gearing also has its risks. In the case of property investment, for example, investors may face difficulties in finding tenants, maintaining the property, or covering the mortgage repayments during periods of vacancy. Moreover, negative gearing relies on the expectation that the value of the asset will increase over time, allowing investors to sell the property for a profit in the future. This assumption is not always accurate, as property prices can fluctuate and may not always rise.

An example of negative gearing in action would be an investor who buys an investment property for $500,000, financed with a loan of $400,000. The investor earns $20,000 in rent for the year, but incurs $30,000 in expenses, including interest on the loan, property management fees, and repairs. The net loss for the year is therefore $10,000. This loss can be offset against the investor’s other income, such as salary, reducing their taxable income and the amount of tax they pay.

In summary, negative gearing can be a viable investment strategy for those seeking to reduce their taxable income, but it also carries risks and requires careful consideration of the costs and potential returns. If you would require more assistance on this matter, please contact our office at 03 9973 5905.