In the real estate investment landscape of Australia, ‘negative gearing’ is a frequently thrown-around term that often incites heated debates and differences of opinion. However, regardless of the viewpoint, it’s imperative for Australian investors to comprehensively understand the carpet before forming their opinions. Therefore, let’s delve deeper into the fundamentals of negative gearing in Australia.
Understanding Negative Gearing
In essence, negative gearing happens when the expenses incurred on an investment property exceed the income it generates. Basically, it’s a financial scenario where the rent payments you receive are less than the costs you yield in maintaining the property, including the mortgage repayments and maintenance costs. Such a financial situation may initially sound unwanted, but it does come with a few advantages.
Benefits of Negative Gearing
Negative gearing can be a stalwart companion in your tax minimisation strategy. The Australian taxation system permits investors to deduct the losses they make through negative gearing from their overall taxable income. This provision effectively reduces your tax liability, resulting in substantial savings.
Moreover, negative gearing is often used as a strategy to forge wealth over time. Real estate investors bank on capital growth – even when the running costs of their property exceed rents. The rationale behind this strategy is the anticipation that the future sale price of the property will eclipse the losses made through negative gearing.
Risks and Downsides of Negative Gearing
Despite the apparent benefits, investors should not consider negative gearing as a fool-proof strategy. It involves significant risk factors such as financial stress from having to cover the rental income shortfall and prolonged periods of stagnant or falling property prices.
The real risk arises when an investor is completely reliant on a substantial capital gain to offset their losses. If the property market does not perform as anticipated, the investor may end up in a precarious financial situation.
Negative gearing should be approached with a clear understanding of your financial circumstances and tax obligations. This is where the expertise of Griffiths Advisory comes into play. We provide personalised taxation advice and guidance to help you successfully navigate the complex world of negative gearing in property. Contact us today for assistance with your property-related tax.
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Phil has been the Managing Director of Griffiths Advisory for 29 years, combining his expertise in taxation, business advisory, superannuation, negative gearing, and wealth creation. He also loves an active lifestyle, indulging in surfing, cycling, snowboarding, and spending quality time with his wife and two children.
