Negative gearing is a popular term among investors, yet its true potential remains unclear to many. Simply put, it is the loss an investor incurs over their investment properties. In other words, when investors’ generated income is far lower than their investment cost, then they incur negative gearing. 

There is another related type, too, which is positive gearing. So, positive gearing occurs when the income earned from an investment property is more than the expenses. Due to this, every investor wants to invest in positive gearing properties but what if they incur negative gearing? Is there any benefit over it? Can they still expect any government help? Will they receive the same treatment as with capital gains? 

Current Scenario 

Currently, negative gearing is a debatable topic among investors during the fluctuating property market and recent economic changes. Research stated that in 2019-20, nearly 1.3 million people experienced negative gearing, making it more debatable for investors.  Further, recent data confirmed that people who have negatively geared properties have taxable incomes below $80,000/year. 

However, understanding this concern, the government provides tax benefits for it. That means the investors can offset this loss over their investment properties. Considering this benefit, some people knowingly invest in such properties but is it worth it? Not only this but there are many other reasons for people to invest in negative gearing properties.   

Reasons for Investing in Negative Gearing Properties 

There are many reasons why more and more people are still investing in negative gearing properties despite incurring a loss: 

• Tax Benefits: The government allowed investors to offset the losses incurred from their investment properties. This led them to reduce their overall tax liability and make investment in negative gearing property a beneficial option for investors.  
• Capital Growth Potential: While negative gearing is a loss, many investors still believe it may generate favourable capital returns later.  This is because the property market is very volatile and at any point, there can be a substantial rise in property prices. 
• Affordable Market Entry: Since property prices in urban areas are rising, loss-incurring property investments present a way for buyers to enter the property market. It mainly appeals to those investors who want long-term investment returns rather than short-term gains. 
• Favourable Investment Strategy: Some investors also invest in such properties using a buy-and-hold strategy. In this, they expect long-term returns from these properties rather than immediate rental returns. 
• Suitable Option for Young Investors: Investing in properties that incur losses can be a suitable option for young investors. This is because many young investors anticipate long-term capital gains rather than just immediate benefits. Additionally, it is the easiest way for them to enter into the property market. 

Cons Of Negative Gearing 

Though negative gearing is a favourable option, it is not for everyone, and it has some cons too. 

Enough Cash Flow Requirement 

Running a loss-incurring investment property is not that straightforward and requires investors to maintain enough cash flow. This is because constant losses can stain long-term financial stability, which may make investors more vulnerable to rising interest rates. 

High Dependence on Tax Benefits 

Besides cash flow requirements, investors can only rely on tax benefits to cover losses over their properties. Additionally, any change in ATO taxation policies may further create significant challenges for investors as they manage their finances. 

Market Volatility 

Since property markets are unpredictable, investors may encounter challenges if property prices decline. There’s also a chance they won’t get a favourable interest rate, which can hamper their mental health and finances.   

Long-Term Commitment 

Negatively geared properties require long-term commitments, which means investors need to wait until they realise their capital gains. Now, this situation can be a disadvantage for those who are seeking quick financial returns. It might also prevent investors from investing in other high-yielding properties.  

Increased Debt 

If investors continually finance a negatively geared property, it may lead to an increase in their debt level. This may happen, especially, if their other sources are not generating sufficient income to cover their losses. 

Impact on Housing Affordability

If property prices increase later in the future due to negative gearing, it can reduce housing affordability for first-time buyers and renters. The outcome can even create social and economic challenges in the entire property market beyond individual investor expectations. 

So, who can be the main beneficiaries of negative gearing? 

Beneficiaries of Negative Gearing

Since negative gearing is becoming more and more popular among Australians, anyone can be the beneficiary of this. However, it will largely depend on the income level of investors. For instance, if investors have a sufficient income level, they can hold negatively geared properties.  

Currently, around 883,325 individuals are taking advantage of this provision per year with appropriate earnings up to $80,000 or less. However, this is also creating losses for them. Approximately 73% of Australians own just one investment property, whereas only 18% own two. This disparity has limited their potential to build a strong property portfolio. 

Apart from this, the rental market participants who want long-term capital gains are further leveraged negatively geared properties. However, negatively geared properties primarily benefit high-income and middle-income earners. 

Positive Gearing V/S Negative Gearing 

As negative gearing has both pros and cons, investors often are keen to learn how it is different from positive gearing. So, positive gearing occurs when your investment gives more returns over your cost.  Compared to negatively geared properties, it allows better financial security to meet all the debt liabilities. 

However, if it comes to long-term capital gains, negatively geared property investments prove more beneficial than positively geared ones. This is because positive gearing allows immediate rental benefits, while with negatively geared, the investor needs to wait for years. 

Meanwhile, positive gearing helps save more with quick debt repayments, while with negative gearing, investors could only offset their losses, which is comparatively lower. 

Then, which one should you consider among negative and positive gearing? How to strategize your investment portfolio? 

Seek the Right Professional Guidance 

Choosing the right investment strategy among negative and positive gearing is often a complex decision. Therefore, investors should seek the right guidance for this. It will help them decide which properties to buy and which strategy to use. Besides, it will help them to improve their finances by building a strong investment portfolio. 

For more guidance and information on negative gearing properties, contact us at Nfinity Financials or call us at 1300 GET LOAN/0456 456 267. 

FAQs

Q1. Is it bad to invest in negatively geared property?

Investing in negatively geared property can bring both benefits and losses. This is because investors incur losses on their investment property but can also offset them through tax benefits. 

Q2. Who can benefit the most from negative gearing? 

Mostly, middle- to high-income earners with stable cash flow get the maximum taxation benefits for negative gearing. 

Q3. Can first-time investors use negative gearing?

Yes, but they must assess whether they have enough cash flow to cover losses. It’s more suited for those with stable incomes and a long-term investment mindset.

Q4. How many people are often negatively geared in Australia? 

According to ATO, 2,047,000 Australians own investment properties, with 1.3 million utilising negative gear investment strategies.