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Negative Gearing is where the total costs (including interest and all expenses) associated with holding an investment property exceeds the income it derives, investors are allowed to offset those losses against their taxes. This is called negative gearing.
A negatively geared property may still have positive cash flow (after tax depreciation is taken into account) or the cash flow may still be negative, albeit reduced by the tax benefits.
Australian taxation law allows property investors to deduct the borrowing, running and maintenance costs associated with an investment property from their taxable incomes. Their taxable incomes include income from all sources, including rental income on the investment property.
So, while an investment property may be making a cash loss in the earlier years of holding it (i.e. until rental incomes rise) the depreciation entitlements entitles you to claim non-cash deductions and receive a tax refund that could in fact exceed the cash losses on the property itself.
Don’t get hung up in the detail here as any decision you make ought to be in consultation with industry professionals who can responsibly guide you.
Your motivation for investing in property should be to make a capital gain over time. The tax benefits derived along the way are there to help make building a property portfolio affordable, and therefore possible, but should never be your primary objective.
Once you have successfully established your investment property portfolio and time and inflation have worked in your favour, there will be a number of retirement options for your consideration. These may involve selling some or all of your investment properties, however, some of the more financially attractive options will involve hanging onto them all.
The bottom line is that by leveraging off the little you have now and harnessing the opportunities available through negative gearing, property investors who build their investment property businesses correctly will have lifestyle choices in retirement that most will only ever dream of.
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