Negative gearing - tax


There is only one way you can ensure your property makes you money – ensure it brings in the dollars from Day 1.

If your property does not make money from the start then you’re speculating on something changing:

  • Values increasing
  • Interest rates decreasing
  • Rents increasing,
  • Or a combination of the the above!

Property is quoted as showing an average annual appreciation of anywhere from 6% to 10%.

In a seven-year cycle, however, there are normally only two or three years in which properties significantly increase in value.  For the other five years you generally find prices are pretty stagnant. This doesn’t mean property won’t go up in value, it just means you can’t always count on it.

This is only bad news for the investor who is choosing a negative gearing strategy. Those choosing negative gearing often do so to reduce the tax they pay.  To make negative gearing work, you need to be sure your property is going to increase in value (and you can only speculate when or if that will happen!).

Tax reduction can be great but not if it means you have to speculate!

Last week I heard a commercial on the radio advertising “tax reduction through property investing”.  Now I’m no accountant but I do know the general rule that if you’re paying less tax, you’re bringing home less money.  The sales pitch was to buy a property that “will go up in value” which sounds great, if you can be sure it will (and let’s be honest, not every property has increased in value in the past three years!).  In the meantime, your property will lose you money and you will pay less tax. Frankly, I just don’t get it. Why would I invest in a property knowing I would lose money?  The ad left me scratching my head.

Then I thought about other investments.  How many share traders would choose to buy a stock on the promise that it would lose them money and therefore reduce their tax bill?

Would you throw your hard-earned dollars into a bank knowing that you’d get less back? Nope, nor would I. Nevertheless, it seems that so many property investors are keen on negative gearing. Keep in mind, also, that selling the property for a profit will also attract capital gains tax.

Negatively geared properties can be very successful investments, provided that there is good capital growth over time to well and truly offset your losses – but to negatively gear purely to save tax, well, you might want to think it through.

I generally choose to invest in positive cash-flow property. Positive cash-flow properties are harder to find so I spend more time searching and carefully do my sums. I know that I will profit from my investments from the outset and I’m not relying on capital growth.

You can do the same and, really, it’s not that hard. It just takes a little more time.  And it takes the guesswork out of successful investing!