All Topics / Help Needed! / Quick Question: What is negative gearing?

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  • Profile photo of blazeblaze
    Participant
    @blaze
    Join Date: 2007
    Post Count: 60

    Hi,

    Been hearing a lot. But I dont know what it is. Is it when your rent income lower than your repayment?

    Thanks :)

    blaze

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856

    More precisely, your costs (council rates, water, sewer, interest, insurance, management fees, strata levies etc) exceed the income generated by the property. The difference comes out of your other income/from other sources.

    Profile photo of blazeblaze
    Participant
    @blaze
    Join Date: 2007
    Post Count: 60

    Thanks Scott. To make sure, when you said interest, is it the mortgage interest?

    Example: Loan is $120K repayment $850/ month. Total repayment = $10,200 for the 1st year. That consist of:
    Interest: $8,800
    Principal: $1,400

    council rates, water, etc etc = $5,000
    rent = $16,200

    Net = income – interest – cost
    Net = 16200 – 8800 – 5000
    Net = 2400 (this is positive gearing)

    Is this how you calculated?

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856

    Yes, interest excludes any repayment of the Principal.

    Profile photo of blazeblaze
    Participant
    @blaze
    Join Date: 2007
    Post Count: 60

    Ah Thanks. So what is the idea behind this negative gearing strategy?

    Negative gearing basically is only more profitable when the growth of the property is higher than positive gearing property right? or is that more into it?

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856

    It is a tax position – as the property is making a loss (even a paper one, through depreciation allowances), that loss goes against the income of the owner (usually in a high tax bracket) to reduce their income and possibly drop into a lower tax bracket.

    Neg gearing does not have any impact on growth as it is an analysis of cashflow & tax effects. An investment property with strong capital growth will eventually get caught up with capital gains tax (upon disposal) .

    There is a lot more to it: +/- geared property can both be profitable based on the growth of the asset price.

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,763

    Hi,

    It needs a slight rewrite, but negative gearing is explained at:

    https://www.propertyinvesting.com/strategies/negativegearing

    Cheers,

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Profile photo of dosqdosq
    Member
    @dosq
    Join Date: 2007
    Post Count: 12

    Yes! This link is what I need. Thanks!

    michaela_alvares5728
    Participant
    @michaela_alvares5728
    Join Date: 2003
    Post Count: 12

    Thanks for that link Steve. I found it very informative and helpful. 

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Negaitve gearing is when you borrow to invest and the expenses are greater than the income received. Usually this is only done if you think there will be a capital gain.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

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