Negative Gearing
Candlefocus EditorTo balance this, investors can claim the loss as a tax deduction against their other income when filing a tax return. This in turn reduces the amount of taxes they need to pay, which is the principal benefit of negative gearing. This makes the investment look more attractive as the cost of borrowing to buy the investment property is partially offset by the tax benefit.
Negative gearing can also refer to other investments which produce income. For example, if an investor sells their shares at a loss, they can can claim the loss as a tax deduction. However, this technique is more popular in the context of property investments, as you can write off a wider range of costs associated with owning a property.
Although negative gearing can be beneficial, it is a riskier way to invest compared to more conservative strategies. In addition to the higher cost of borrowing and the chance of not being able to recover costs, investors must also consider the possibility of property values decreasing. This could mean their property is not worth as much when they come time to sell it and have to repay the loan.
In summary, negative gearing involves purchasing an asset with borrowed funds and claiming a tax deduction on associated expenditure. This technique can work well for investors who seek lower taxes and capital gains when they come to sell their asset. That said, there is a higher risk associated with negative gearing, as losers must make up costs if their asset's value decreases.