The Trick with Negative Gearing

Now, negative gearing has been the godsend for all accountants back in the 1980s and early 90s. Then it became the dirty word because it was shown that too much negative gearing meant that you were locking yourself into a job for the rest of your life. But I am here today to talk to you about the middle ground because negative gearing was certainly over used. I absolutely agree with that, but on the other hand, it also can be the right strategy if you are in the right kind of circumstances.

Let me first explain what negative gearing actually is. Basically, it is when you buy either a property or a share portfolio or even a type of business in circumstances and the income that you get in is not sufficient to cover all of the expenses going out and provided it is on the certain class of assets like property for instance, then the negative cash flow effect can be offset against your other income.

We are not talking about something like a piece of real estate then on top of that, you also get non-cash deductions for the depreciating value of the building or the fixtures and fittings within building and we call that commonly depreciation.

Depreciation is sort of like a tax deduction for not spending any money because the tax office gives you a little bit of tax relief on a year by year basis for the value of your property going down and the light fittings, carpets, curtains, etc., all the fittings and fixtures, as we call them going down in value as well.

As we know real estate hardly ever goes down, but what is actually appreciating is the land content and the value of the structure on the land rather than the building itself because buildings do depreciate. They need repairs and they need fixing up and they will eventually need improvements and things like that. That is what that tax deduction is for, but getting back to negative gearing….

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