Why You Should Use Negative Gearing to Grow Your Investment Portfolio

Negative gearing (net losses reported when the income from an asset purchased using borrowed funds cannot meet the loan interest and operating costs of that asset) can be a helpful way for you to grow your portfolio of investments. This article discusses some of the benefits that you can enjoy if you start using negative gearing in your investment strategy.

No Caps on the Losses Recognised

Negative gearing has no limit on the magnitude of the losses that you can report to the tax authorities during any tax year. Consequently, you can borrow as much as you want in order to acquire several assets so that each of those assets can be negatively geared. How is this good for you? Your assets, such as rental houses, may keep appreciating in value during that time when you are negatively gearing them. That value can be realised when you eventually sell off those assets. Only a small fraction of that additional value will be lost as capital gains tax.

Reduction of Your Tax Obligations

Another key benefit of negative gearing is that the losses that you incur against a given asset can be offset from your income from other sources. For instance, the losses incurred from an apartment block that you acquired using a loan can be offset from your income as a consulting engineer. Thus, you will pay less in tax against your consulting income since some of it will have been used to offset your losses in the real estate venture.

More Tax Refunds

Negative gearing can also make you eligible for subsidies in the form of tax refunds. This is possible if you are engaged in activities, such as trading, which may require you to deposit some money towards your tax obligations before the end of the tax year. The losses registered from the asset that you are applying negative gearing to can enable the tax authorities to issue tax refunds to the magnitude of the losses reflected in your books of accounts.

Like all things, negative gearing has a good as well as a bad side. For example, the allure of negative gearing can drive some people to acquire more assets than they can sustain during the period when those assets are making losses. Such assets are at risk of being repossessed by the lender. It is therefore prudent for you to work closely with your financial and tax advisors so that you maximise your benefits from negative gearing without taking on too much risk.