Negative gearing has been a bit of a buzz word that’s hummed around the newsroom; come up in a bunch political stories, stirring hatred amongst first home buyers and making leaseholders (future property owners) extremely confused.

So, I thought I’d give you the definition in black and white to stop any further confusion in the dozens of articles that are sure to mention the term in the near future.

 

Gearing, in a nutshell, means borrowing money to purchase an asset – in most cases, this is used to buy property.

Negatively gearing means that the rental income on an investment property will be less than the interest payment on the loan – the benefit comes with the capital growth (an increase in property value).

 

Let's break this down... 

 

For example, according to RealEstate.com:  If you purchase a property for $440 000 and take out a loan for $400 000 at an interest rate of 7%, the annual interest payable on the loan is $28,000.

Also imagine that you are earning $430 per week in rent, which adds up to an annual rental income of $22 360.

Based on the above example, you are paying $28 000 in interest but only earning $22 360 in rent, which means there is a shortfall of $5640 per year.

 

At the same time, this property should be going up in value and is worth more as time goes on. If the property went up in value by 10% in a year, it has increased its value by $44 000.

At the end of one year, you have paid out $5640 in interest but the property has increased in value by $44 000, which means that you are $38 360 richer than you were 12 months ago.

 

This is where it gets a little controversial because that shortfall amount of $5640 is actually tax deductible. So you can claim the rental loss on tax and your asset has increased in value by $44 000.

#Winning 

 

Hopefully, this clears a few things up for you!