Negative gearing allows people to borrow money to purchase an income producing property, to claim a tax deduction for expenses they incur operating the property … including loan interest.
Your tax refunds associated with negative gearing, together with your rental income, are used to pay off your loan, and any shortfall coming out of your own pocket.
The end result … down the track, the tax man and your tenants will have paid most of your running costs for you and your property will have more than doubled in value, so you can now sell it and earn a tidy profit, or use this system to accumulate multiple properties to use the rental income as part of your retirement portfolio.
In the early stages of investing in a negatively geared property, your costs like interest and so forth, are higher than the rental income you receive, so your property is negatively geared.
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Apart from negative gearing, there are two other types of gearing situations which offer you even more benefits.
Firstly, there’s neutral gearing which happens with the costs incurred “running” your income producing property match the income that the property generates. And then there’s positive gearing, where the income from your property actually exceeds the costs of running the property.
Negative gearing is the first step for most investors because, through the HUGE tax deductions offered, it is by far the most affordable, so it enables you to purchase multiple properties for a low up-front and ongoing cost.
Once your loan has reduced, and your property has increased in value, you’ll start to experience neutral gearing – providing of course investors employ a long term strategy. This process is greatly accelerated with Mortgage Reduction.
Then down the track your portfolio will be positively geared which is the ultimate goal for many investors, enabling you to retire on a very comfortable income … much higher than you’d expect through superannuation.
