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Fast facts about negative gearing

  • February 05 2020
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Invest

Fast facts about negative gearing

By Louise Chan
February 05 2020

What is negative gearing?

Gearing is when investors borrow money to purchase an investment. When investors buy a loss-making investment, it’s called negative gearing.

Fast facts about negative gearing

Fast facts about negative gearing

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  • February 05 2020
  • Share

What is negative gearing?

Gearing is when investors borrow money to purchase an investment. When investors buy a loss-making investment, it’s called negative gearing.

Fast facts about negative gearing

What is a negatively geared property investment?

Gearing may be used to buy any investment asset, but it is more commonly employed by property investors.

A negatively geared investment property means that the sum of expenses (including loan interest and principal payments) is higher than the rent income generated.

Investors need to use their own income to pay for the remainder of expenses.

Benefits of negative gearing

The Australian Taxation Office (ATO) allows negatively geared investors to offset the loss against their tax payable.

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This tax offset and the hope that the asset will increase in value enough to recover losses when liquidated is what negative gearers are after.

Negative gearing and regulations

Because many property investors use the negative gearing strategy to minimise their tax payable, there have been several propositions to reform its regulations and impose tighter restrictions.

As at 1 July 2017, ATO enforced tighter restrictions on:

  • Depreciation deductions claims for plant and equipment items in residential and rental real estate
  • Offsets for travel expenses incurred for any transaction relating to the property

Despite this, the Australian Labor Party (ALP) proposed even tighter restrictions on negative gearing in the lead up to the 2019 elections.

Proposed changes to negative gearing

The government has kept an eye on negative gearers to ensure that the tax privileges they are given are not taken advantage of. In fact, the Opposition has been vocal about enforcing tighter restrictions should the party win elections.

ALP’s most recent attempt to tighten negative gearing rules were proposed in the run up to the May 2019 elections:

  • Negative gearing strategy may only be applied to newly constructed properties
  • Only negatively geared properties purchased before 1 January 2020 will be fully grandfathered

ALP’s election loss halted further restrictions on this strategy, but it may not be the last time restrictions will be proposed or enforced.

If you’re a rookie property investor who wants to use the negative gearing strategy, it’s highly recommended to seek the advice of a licensed professional before securing a property.

Fast facts about negative gearing
Fast facts about negative gearing
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About the author

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Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

About the author

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

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