Investing in real estate loses its sheen if your tax bill overwhelms any returns/ potential returns you make here. However, there is a way out if your tax dues are causing you sleepless nights – Negative Gearing. Many savvy Australian property investors employ negative gearing to cut their tax bills and maximize their savings.

What is Negative Gearing?

Simply put, negative gearing is a very effective and simple tax strategy that allows you to set off net losses on your property against other income so that your tax dues are reduced significantly. You can employ negative gearing when you have borrowed money to acquire property and the interest payable on this loan plus other costs pertaining to this acquisition exceed the rental income you make from the property. The resulting net losses that have accrued can be set off against income you earn from other sources such that your taxable income is brought down, thus reducing your tax payments as well.

Invest in High Quality Properties to make the Best of Negative Gearing

Negative gearing can help you fund your retirement nest egg too. However, this is possible only when the underlying asset, i.e.: the property in question is a high quality one that will yield good returns/ resale in the future. Making sure that you invest in viable properties is critical if you want to make the best use of negative gearing.

Properties that are likely to show excellent capital growth are the ideal choices if you want to use negative gearing. The capital growth or long term value appreciation on such properties will more than make up for any short term or current loss that you may incur on them. In effect there is a two pronged advantage in using negative gearing on quality properties: 1) you enjoy immediate tax relief and 2) you acquire a property that is highly likely to yield long term capital appreciation.

Caution: Negative Gearing Makes Sense Only in Rising Markets

One of the most damaging mistakes property investors make is to employ negative gearing when prices are in a decline. The basic premise of negative gearing as a tax saving/ profit making tool is that in future, the value of the property will rise substantially. That means negative gearing will work only in a rising market. It is critical to understand that this is a guaranteed loss strategy which will turn profitable only when your underlying asset evolves into a more valuable one than it is at present.

In effect, negative gearing may not be the right tool to employ in all investing environments. If you are new to real estate investing, enrolling in a mentoring program like the one offered by Real Estate Investing Australia is a smart first step so that you can have your negative gearing strategy whetted by experts in this arena.