Investment enhancement through negative gearing
In the current financial market, young professionals are often more likely to purchase an investment property before a home for them to live in. This is mostly due to the fact that property prices are incredibly high. Therefore, if a person purchases an investment property they will be able to pay off the mortgage with the assistance of weekly rent from tenants, thereby reducing the day-to-day burden of Property Investment Loans repayments. Furthermore, the requirements to be approved for a property investment loan are less stringent than other loans due to the understanding that tenant rental payments will alleviate financial pressure on the owner. Additionally, in some countries (such as Australia, Japan and New Zealand), the financial strain can be reduced further by negatively gearing the property. In the three aforementioned countries there is no limit on the amount of properties that an individual can negatively gear, regardless of wealth. In essence, negative gearing is an investment enhancer as well as a form of financial leverage that can be used to assist with weekly/fortnightly mortgage payments by redirecting a percentage of the ownerâ€™s tax to assist paying off the investment property. This is made possible because any losses incurred from negatively geared investments are taxdeductible against personal income! Therefore, you are making a theoretical loss, but this is resolved by rental payments from tenants as well as returns from the tax man. Further, negative gearing is made possible when the investor has borrowed money to purchase the property, but the investment generates a negative cash flow. In practice this means that if the investor is being taxed at 40% at his job, he will be able to redirect up to 40% of the money he is taxed toward paying off his mortgage. When considering the purchase of an Investment Property and the utilization of negative gearing it is important to invest in areas that are highly likely to experience strong capital growth. This will buffer the short term loss that the investor may experience.
Furthermore, by buying in areas of good capital growth, the likelihood of securing long-term and consistent tenants is far more likely. In order to successfully manage a negatively geared property, consistent rental payments play a key part. Therefore, if there is a tenant shortage in the area, it is time to reconsider your location in favor of an area known for high tenancy occupation rates. Although negative gearing is most often used in reference to investment property, new investors should also be aware that it can be applied to the purchasing of shares that fall short of interest costs. The tax policy relating to this variety of gearing is the same as for property and should therefore be considered alongside investment property as a potential avenue for investment enhancement as well as tax deduction. Australian property investors have been having huge success by negatively gearing their properties for many years. These strategies have dramatically reduced personal income tax revenue in Australia by $600 million in the 2001-02 tax years, $3.9 billion in 2004-05 and $13.2 billion in 2010-11.
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Published on Nov 30, 2013
This is mostly due to the fact that property prices are incredibly high. Therefore, if a person purchases an investment property they will b...