Negative Gearing in simple terms
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Negative gearing is where your expenses on your rental property exceed the income from the property. This loss is now offset against your income from other sources (like your salary). Hence, your taxable income is reduced, so you pay less tax overall. This means that the loss on the property is not as heavy as it first seems.
If your salary is 50k, you pay a certain amount of tax. If your salary goes down by 5k, you pay less tax. But you also have less at the end of the day.
That's pretty much it for the deductions part.
For the other parts (future returns from the investment, non-cash nature of depreciation, opportunity cost) there is no simple explanation.
That's pretty much it for the deductions part.
For the other parts (future returns from the investment, non-cash nature of depreciation, opportunity cost) there is no simple explanation.
Thanks guys, I've also found this while googling about NG, explained me a lot.
http://www.propertyinvesting.com/strategies/negativegearing
http://www.propertyinvesting.com/strategies/negativegearing
You lose money each year and pray that it increases each year.
So the benefits are:
Makes you want to earn more; and,
Makes you pray each night.
Negative gearing can happen when individuals borrow money to buy an investment property in their names for rent to tenants.
If the investment property 'makes' money after accounting for all expenses including interest payments and the implied costs of used operating life of plant (eg heater) and building (usually over 40 years) then the profit is split between the individual owners and added to their incomes for tax.
On the other hand if there is a loss then the loss is also split between the individual owners and they have lower incomes by the same amount of the loss when accounting for tax. This situation where the taxes on the individual owers would be lower than otherwise is called negative gearing .
If the investment property 'makes' money after accounting for all expenses including interest payments and the implied costs of used operating life of plant (eg heater) and building (usually over 40 years) then the profit is split between the individual owners and added to their incomes for tax.
On the other hand if there is a loss then the loss is also split between the individual owners and they have lower incomes by the same amount of the loss when accounting for tax. This situation where the taxes on the individual owers would be lower than otherwise is called negative gearing .
You lose money, thats how it works
That's very simplistic. If your property is not gaining in value, you lose money but if it goes up in value, you could be ahead.
Negative gearing is basically gambling as one is hoping and praying that their property may go up in value to recoup some of the losses
Arrrrrrr
Let me reinforce a point here, negative is not just propert, it is any investment. Media and other ignorant types love to get on the bandwagon knocking property investors. Please don't help them by posting property only comments on a google searchable page.
Anyhow, ng has its place but not for long periods. Nothing wrong with occasional gamble Nathan (like vacant land in Riverstone...) but can't see a case for it long term. Also, tax brackets reduce effects rather quickly for those on the average income.
And, any investment that relies on tax advantages and not just its own merits is not often a good investment.
PS Sorry about typing, using my phone
Let me reinforce a point here, negative is not just propert, it is any investment. Media and other ignorant types love to get on the bandwagon knocking property investors. Please don't help them by posting property only comments on a google searchable page.
Anyhow, ng has its place but not for long periods. Nothing wrong with occasional gamble Nathan (like vacant land in Riverstone...) but can't see a case for it long term. Also, tax brackets reduce effects rather quickly for those on the average income.
And, any investment that relies on tax advantages and not just its own merits is not often a good investment.
PS Sorry about typing, using my phone
True, negative gearing is popular with Australians since we have a strongly gambling oriented mindset (the biggest gamblers in the world). The concept of heavily leveraging into a money losing investment seems completely crazy to most foreigners.Negative gearing is basically gambling as one is hoping and praying that their property may go up in value to recoup some of the losses
While the credit taps are turned on everything is hunky dory but when the money stops, look out !
Twodogs, I think you have a degree in financial management when you see 'negative gearing' as an example of the upfront negative cashflows in an overall perspective of some high capital investments. Try telling to the diehards against upfront cashflows and led by an 'investment guru' DB. The guru calls it 'stupid' and others including some disciples call it 'gambling'.
This debate has been aired before to justify ones investment journey.
No, no and no...
You don't lose money, you write a paper reporting loss. Big difference.
In fact, there are a lot of Cash Flow positive, negatively geared properties out there like mine. When you factor in depreciation you take a paper profit and turn it into a paper loss and bank further profit from your investment through real banked tax reductions.
I always look at property investment a bit like this:
Returns:
4.5% rental yield
3% capital gain (assuming circa inflation)
1% negative gearing benefit from tax reduction
Costs:
5.0% interest (5.5% on the loan portion only)
1% other
Net return around 2.5% of the total value. So, if its worth $500K and you borrowed 80% or $400K then your $100K investment made you $12.5K or 12.5% Net. And that assumes only inflation rate capital growth.
But in simple terms, the first response (Aaron C) best encapsulates Negative Gearing. Do not equate Negative Gearing with Negative Cash Flow or even Negative returns from investing.
Cheers,
Michael
You don't lose money, you write a paper reporting loss. Big difference.
In fact, there are a lot of Cash Flow positive, negatively geared properties out there like mine. When you factor in depreciation you take a paper profit and turn it into a paper loss and bank further profit from your investment through real banked tax reductions.
I always look at property investment a bit like this:
Returns:
4.5% rental yield
3% capital gain (assuming circa inflation)
1% negative gearing benefit from tax reduction
Costs:
5.0% interest (5.5% on the loan portion only)
1% other
Net return around 2.5% of the total value. So, if its worth $500K and you borrowed 80% or $400K then your $100K investment made you $12.5K or 12.5% Net. And that assumes only inflation rate capital growth.
But in simple terms, the first response (Aaron C) best encapsulates Negative Gearing. Do not equate Negative Gearing with Negative Cash Flow or even Negative returns from investing.
Cheers,
Michael
Amen brother!
It has made us enough for hubby to stop working at 50, and we don't hold that much property. Negative gearing plus careful planning can work.
Oh dear! My wife and I have both retired and our crops of hair are better than when we were employed. Marriage is still intact. Reserves OK and grown. But, of course, there are also benefits for salesman, PM, tenants, tax man (I am glad this is mentioned, usually NG is mentioned in the context of it being a 'concession' and a drag on society). Benefits should happen in a legitimate and voluntary win-win transaction.
I hear you Nathan and your model is bloody brilliant! But one shoe does not fit all. I earn a very hefty salaried income and work long hours doing that day job and have little time to dedicate to building and managing a large CF+ portfolio. Though I do see a lot of merit in what you do and take my hat off to you. I love being on the tools and often wish I could get into those areas and buy and reno for CF+.
But in the end, the negative gearing approach has really served me well. My HDT structure means I have a lot of company deductions that offset my rental incomes and this creates huge tax concessions for me. I paid 0% income tax this year.
Each to their own. If I had the choice I'd swap my portfolio for yours in a blink. But I'm not doing too bad, I'll get there in the end...
Cheers,
Michael