What's the deal with negative gearing?

When you're after property investment advice in New Zealand, you'll likely come across a whole range of jargon – and just one of these is negative gearing. Investors can easily take this term any which way.Some think of it as a handy way to get a tax break, while others are a bit confused about how a loss-making property can sometimes be a good investment. Figuring out what strategy to take can be a complicated and finely-tuned process, but keep these pointers in mind when figuring out what route to take.

What is negative gearing?

Getting your head around this term is the first step. Put simply, if the repayments and cost associated with owning the property. That is, repayments you make on the mortgage, maintenance and so on outstrip the income you receive from the property in the form of rent from your tenants, your property is negatively geared. You are essentially borrowing to make a loss. This might seem a bit strange, there are a couple of reasons why investors choose this strategy.

What are the benefits?

The most common is the tax benefits. In New Zealand, the loss you make between rental income and interest repayments can be claimed as a tax deduction. This lowers the level of tax you have to pay on income and can even give you a bit more in the bank. This seems appealing in theory, but there are a few things you need to be aware of. For one, a lot of investors jump straight into this strategy without fully understanding the consequences. 

While you might be making a loss in the short term, the number one aim is still to make a profit. It's not just a simple matter of claiming a tax deduction and making money – that's why a lot of investors focus on turning a profit in the long run. Your plan might be to make money from value growth, but remember: The money you make from growing values is only available after you sell. This strategy isn't for everyone, so make sure you have a chat with your adviser before making any decisions. 

There are no guarantees in life or in property, but when it comes to getting reliable advice on residential investments, an Authorised Financial Adviser can set you on the most suitable path. 

Here's to your financial independence!

Daniel Carney
Authorised Financial Adviser / Investment Property Expert

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