Accountant telling us negative gearing is best

Could anyone confirm this please as I still don't understand.
My brother is about to settle on his 1st IP. He currently rents and is happy doing this. He earns $100,000. Property is worth $600,000. His accountant told him yesterday that he is best off Negative gearing as much as possible (ie. Having an offset account which has no money in and then having a savings account where he puts rent etc). Then come tax time he will be able to claim a bigger amount.

The way I see it is Negative gearing is give a dollar get 30 cents back... Where as positive gearing is gain a dollar and lose 30cents ish....

So I would be tempt d to place all his money in the offset account and try to make money.?!

He is telling me I have got it all wrong as his accountant has told him it's complicated to explain but to trust her...

Can anyone help explain?

Cheers
 
Could anyone confirm this please as I still don't understand.
My brother is about to settle on his 1st IP. He currently rents and is happy doing this. He earns $100,000. Property is worth $600,000. His accountant told him yesterday that he is best off Negative gearing as much as possible (ie. Having an offset account which has no money in and then having a savings account where he puts rent etc). Then come tax time he will be able to claim a bigger amount.

The way I see it is Negative gearing is give a dollar get 30 cents back... Where as positive gearing is gain a dollar and lose 30cents ish....

So I would be tempt d to place all his money in the offset account and try to make money.?!

He is telling me I have got it all wrong as his accountant has told him it's complicated to explain but to trust her...

Can anyone help explain?

Cheers

Can he ask his bank to increase the interest rate on the mortgage? That will increase his tax deductions.

At the moment ive git a substantial sum deposited in an offset a/c against an Ip mortgage as I have no nondeductible debt to offset to. Yes i'll pay tax on the income from the IP - big deal
 
"Trust me", is a great answer when you're making a purchase answer up hundreds of thousands of dollars.

As you say, negative gearing looses some money and gets a tax deduction as a result, positive gearing makes money but you have to pay tax on the profit.

Neither is a strategy in itself.

You would negative gear with the expectation that the value of the property will increase over time. The increases should far outweigh the costs. The problem is that too much negative gearing has an impact on your cashflow, lifestyle and ability to make ends meet. It's a strategy of a short term sacrifice for a longer term (potential) gain.

With positive gearing you're making a (very small) profit on the rental income and some capital gains would be nice too.

A lot of people are favouring positive gearing because they're not confident that the capital gains party will continue. They'll also argue that if it's putting money in your pocket, you're not going to go broke doing it. Both are very valid.

The argument for negative gearing is that it's incredibly hard to find a property that is not negatively geared. Many people try to buy as best they can and in an area where capital gains can be expected (this isn't as hard as it sounds). Rental increases over time means that negative geared properties do tend to become positive geared which is nice.

A cynical part of me things that accounts like to recommend negative gearing because then they get to show how good they are whey they get you a larger tax return. :mad:

I'd suggest people need to understand how they're going to make money from any potential property purchase, and where it fits overall. Within parameters negative gearing is a very valid strategy and has made many people very wealthy. So has positive gearing, but I would not advocate buying a property only because it puts $20 per week into your pocket; there has to be more to it than that.

Often a great strategy is a mixture, somewhere between the two.

If you don't understand the implications of both strategies, then further education is required. "Trust me", doesn't cut it.
 
The accountant maybe onto something, I don't have a magic 8 ball but google tells me

"positive gearing is the best strategy" yielded about 445,000 results (0.30 seconds)

Whereas

"negative gearing is the best strategy" yielded about 28,000,000 results (0.36 seconds)

So I tried...

"cashflow investing is the best investment strategy" yielded about 6,490,000 results (0.33 seconds)

and

"capital growth investing is the best investing strategy" yielded about 39,100,000 results (0.39 seconds)

:D
 
Maybe he misunderstood the accountant or there is more to the 'advice'.
Another place to invest spare cash rather than in the offset perhaps?
SS into super?
 
(ie. Having an offset account which has no money in and then having a savings account where he puts rent etc). ....

Can anyone help explain?

Cheers

This will be the case if the savings account is in another person or entity who is carrying forward a loss for example.

Also becomes the case if you prepay interest for 12 months to get tax benefits in the current year.

The Y-man
 
Money sitting in a separate account gets a piddly rate of interest and then you will pay tax on the interest whereas the same money sitting in the offset account may not be getting interest however is effectively earning the same rate of interest as the loan but without any tax liability.
 
Ripper, as in ripping them off with poor advice perhaps. ;)


Hehehe. Something like that:)

I think if there is anything that Steve McKnight has done/contributed with regards to property investing is showing Australians that there are better ways to make money from day 1 by sourcing cash flow properties.

The only time I buy negatively geared properties is when its a development site to add value or we are in the early stages of a rising market, buy as many as you can and sell down to reduce debt and go from neg- to pos+ cashflow.

MTR:)
 
it's complicated to explain but to trust her...

If you can't explain something to a 5yr old - you don't fully understand it yourself.

Maybe the accountant is very knowledgable in taxes, and ways to ensure a large return - however - has little understanding of generating real wealth.
It is possible to have a cash flow positive property, and still have it tax negative.

But yeah "trust me" falls a long way short of acceptable.

Blacky
 
Could anyone confirm this please as I still don't understand.
My brother is about to settle on his 1st IP. He currently rents and is happy doing this. He earns $100,000. Property is worth $600,000. His accountant told him yesterday that he is best off Negative gearing as much as possible (ie. Having an offset account which has no money in and then having a savings account where he puts rent etc). Then come tax time he will be able to claim a bigger amount.

The way I see it is Negative gearing is give a dollar get 30 cents back... Where as positive gearing is gain a dollar and lose 30cents ish....

So I would be tempt d to place all his money in the offset account and try to make money.?!

He is telling me I have got it all wrong as his accountant has told him it's complicated to explain but to trust her...

Can anyone help explain?

Cheers

I agree with you, put the money in the offset account, it is the best after tax return :)

If he has a PPOR or intends to buy one using the offset money, have the loan on the IP interest only.
 
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