Negative gearing involves borrowing money (also known as gearing or leverage) to purchase an investment property. Next, the rental payments from the investment property need to be less than the interest costs and general property upkeep. These losses can be deducted from the investor’s taxable income, reducing the amount of tax the investor needs to pay. As a result of the loss between rental payments and interest payments and other property expenses, this is known as negative gearing. If the opposite occurred, and rental payment was above interest and other investment property related expenditure, the investment would be positively geared.
Apart from tax benefits, negative gearing becomes profitable if the investment property is sold at a profit or capital gain. Here investors are banking on selling the property for more than they bought it for, also known as capital gains in order to make a profit. If the property prices rise, the total value of the asset rises and the investor has made money.
Investors need to consider whether or not they have the funds to be financially sound whilst incurring the losses for negative gearing. Interest rates also need to be monitored as well. Investors must ensure they have other sources of income to cover the expenses in the meantime.