• Alison Kaigan

How does negative gearing work?



We love these types of questions. As far as we’re concerned, there’s no such thing as a silly

question. Here’s a few questions I hear regularly that you may have wondered the answer to:


- How does superannuation work?

- How much money do I need to retire?

- Should I buy an investment property?

- Should I put money into my super fund?

- When can I access my superannuation?

- Do I need insurance?

- What is income protection cover?


I do also get some very obscure questions, which I won’t be mentioning specifically – as a

Financial Adviser I respect all questions that are asked of me and firmly believe that there are no

silly questions. And to answer the original question of how does negative gearing work? It’s

essentially an investment using borrowed money that costs more to own than the income that

comes from it. So essentially money is borrowed for the investment, and then more money goes

out than comes in. Or put another way, it’s an investment that costs money to own. In the media

negative gearing is most commonly referred to in the context of property investing, but negative

gearing doesn’t just involve property investments, it could be share or managed fund

investments.


Another important thing to note about negative gearing is that because money is borrowed, the

level of risk associated with the investment is higher. You may ask why anyone would want a

negatively geared investment if it’s risky AND you lose money? Currently, the loss incurred may

be claimed as a tax deduction against other income. So if you have a high salary and a high

marginal tax rate then you may save some tax if you have a negatively geared investment. But

it’s important to note that even though you claim a deduction and get some tax back, you don’t

get back 100% of what you lost. You still lose money.


So why would you do it? People generally do it with the intention of the investment going up in

value over the long term. So when the increase in value is taken into consideration, overall, the

investment might be worthwhile, or better. However it’s important to note that this strategy

involves risk. The investment doesn’t always go up, and because negative gearing involves a

loan, things can potentially go bad very quickly if the investment value goes down. And even if

the investment value does go up, it still needs to go up enough that the profit after capital gains

tax still makes it worthwhile – something that many people do not consider.

So now you know how it works, why someone might do it, and also that it can be quite a risky

strategy. So if you were thinking of negatively gearing I strongly suggest that you speak with a

licenced Financial Adviser first. They can help to work out whether it’s a worthwhile strategy

based on your financial goals, or whether there may be other options available for you that might

be more suited to your financial situation, or involve less risk.


Property is just one area of investment, there may be other investment advice areas to consider.

They can also explain the importance of appropriate insurance with regards to a negative gearing

strategy, and consider other relevant areas of financial planning advice that might be relevant.


You might have other financial services or planning services needs, and you may also need to

speak with a lawyer about estate planning.

One particularly important thing to note with regards to negative gearing and investments is that

an investment strategy generally should not be chosen based on expected tax outcomes. Ideally

an investment strategy will be chosen on its merits, and because it’s a good strategy for you,

your financial future and your individual personal and financial circumstances.


If you're thinking about an investment property, investment strategy or negative gearing

investment strategy, you're welcome to get in touch and I can explain the advice process and

how it works. Whilst I'm a financial planner in Canberra I can provide advice Australia-wide. But

whether it's me or someone else, please consider receiving advice from a licenced Financial

Adviser before embarking on a potentially risky investment strategy.


Alison Kaigan - Your Canberra financial planner

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Phone: (02) 8081 0208

Postal Address:

PO Box 5165 Lyneham ACT 2602 

Business Address:

Level 9, Nishi Building, 2 Phillip Law St, New Acton ACT 2602

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