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What is Negative Gearing?

The Reserve Bank announced the official cash rate will hold at 2.00% at its April meeting on Tuesday 5 April. As we progress through 2016, it is a great idea for investors to review their current position.

The ins and outs of negative gearing

Although experienced investors probably know all about negative gearing, there are many Australians left scratching their heads. What is negative gearing and how does it work? Let’s take a look at the basics.

What is it?

When you buy an investment property and you take all income and offset all the expenses of owning that property into account, such as the cost of interest repayments on your mortgage, repairs and insurance, often times that property will not make you money in the short term, it will actually lose money.

This resulting loss from the property investment can be offset against other personal income. This reduces your taxable income, which in turn can provide tax savings.

How does it work?

The best way to explain how negative gearing works is through an example: if you owned a rental property that made $20,000 in rent each year, but the annual cost for you to hold onto the property came to $30,000, you’d have a taxable loss of $10,000. You can use that loss to reduce the tax payable on your salary.

How to maximise your investment

Negative gearing usually plays a role in property investment strategies. Tax outcomes are not the sole driver of investment decisions and you need to think about all the implications before taking a step forward.

As with all financial decisions, it’s important to consult with the experts. If you’re preparing to buy your first investment property, speak with financial professionals such as your accountant, a depreciation specialist and, of course, your mortgage broker, is the first step in setting up your investment purchase.

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