How Negative Gearing Can Boost Your Financial Future

How does negative gearing work?

Negative gearing is a tax strategy where an individual invests in an asset, often property, and incurs more expenses than they earn from it. The loss made on the asset, i.e. the difference between the income and expenses, can be offset against other income, such as wages.

Why do people choose to negatively gear?

Capital Gain: The primary goal is to realise a significant capital gain when the asset is sold. This gain, which is partially taxed, can offset the initial losses.

Tax Benefits: By deducting the losses from the negatively geared asset, individuals can lower their total taxable income, and therefore reduce their overall tax liability.

Investment Diversification: Some people use negative gearing as a way to diversify their investment portfolio.

Key Points to Remember:

Not Exclusive to Property: Negative gearing can apply to any investment, including shares.

Tax Implications: While it can reduce immediate tax liability, long-term tax strategies should be considered. Importantly, the maximum marginal tax rate in Australia currently is 47%. This means that for every dollar lost on a negatively geared investment, the maximum tax reduction is 47 cents.

Risk and Reward: While negative gearing offers potential tax advantages, it also involves risks. Property and share values can fluctuate, and interest rates can rise, impacting your investment's profitability.

Government Policy: Government policies and tax laws can influence the attractiveness of negative gearing.

Positive Gearing:

In contrast, positive gearing occurs when the income from an investment exceeds the expenses. This income is then added to the individual's taxable income.

Calculating How Negative Gearing Impacts Your Income:

To determine the impact of negative gearing on your taxable income, deduct total rental income from eligible expenses incurred within a tax year. This net loss can then be offset against other income sources, reducing your total taxable income and potentially minimising your tax liability. Please use this link to calculate how negative gearing can reduce your taxable income. Here

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