The recent proposal from Labor to restrict negative gearing could reignite property booms – by limiting negative gearing tax benefits to investors who buy new homes and not existing ones, this threatens to send investors buying up existing real estate before the cut-off date. All eyes will be on the outcome of this.

So what exactly is “negative gearing”?

It is the process of adjusting the borrowing on a property so that annually the property operates as a financial loss, which can be used to reduce your taxable income and either reduce the tax payable or result in a tax rebate.

The Pros

Negatively gearing shares and property investments are an effective alternative to superannuation.

Generally, investors consider the investment’s capital appreciation, rather than income, when deciding to negatively gear property or shares.  When investors seek finance to negatively gear shares, financiers will allow investors to borrow up to 50 percent of the portfolio’s value.

Alternately, investors who negatively gear property can borrow up to 70-95 percent of the property’s value.

The volatile nature of the share market is one reason to choose negative gearing property rather than shares.

The rises and falls of the share market may lower a share portfolio’s value to below the required loan equity level.  This means the Investor may have to find additional security or renegotiate the loan.

The Cons

The main disadvantage of negative gearing is that it requires you to have a high cash flow.

It is also a higher risk investment than superannuation because there is no guarantee that the invested property’s value will remain constant or rise in the short term.  Negative gearing is a long-term investment.

If you are considering negative gearing talk with your local financial advisor about the opportunities.

If you’d like to get some personal advice on a property investment opportunity and become a property investor or expand your portfolio, please feel free to contact our New Client Consultant Angela King on 0408 284 053.

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