Negative gearing is a term you may have heard thrown around, but do you really know what it means? It’s an investment strategy that has become increasingly popular in recent years as a way to use your income to generate growth on assets. While negative gearing does come with some risks and restrictions, understanding how it works could potentially help you turn your finances around for the better and create more financial freedom. In this post we will break down exactly what negative gearing is, how it works and why Millennials and Gen Xers are taking advantage of its benefits. Get ready to unlock the power behind Negative Gearing!
Negative gearing is simply when the cost (including interest) of an investment exceeds the income. The difference is tax deductible and will be taken off your taxable income. Here is a simple example of how is works.
Investment worth $500,000 earning $300 p/w after costs.
Loan of 400,000 with $400 p/w in interest.
$400 – $300 = $100 loss p/w.
$100 p/w annualised = $5200 tax deduction off your taxable income.
Let’s assume that you are earning $140,000 in the above scenario. That means you are in the $120,000-$180,000 tax bracket (the second highest) which means you pay 37 cents for every $1 you earn in that bracket.
By having the above loss, you can reduce your income by $5,200 which saves you $3,172 in tax.
This brings the total after tax loss down to $2,028 for the year.
By relying on negative gearing you run the risk of:
If you have a high disposable income and you are in a higher tax bracket then negative gearing might be appropriate for you to consider as a part of a high growth investment strategy. Consult your financial adviser or accountant to see if you fit the minimum requirements to make it a potential success.
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