What Is Negative Gearing?
Negative gearing is a practice common in property investing. It is a form of financial leverage that describes the purchase of an income-producing asset, such as a rental property, but when the asset will not produce enough income to cover the cost of the asset. For example, when the rental income is insufficient to cover the loan payments, maintenance, interest, or depreciation for the asset in the short term. Ideally, the asset will eventually produce enough money to cover those costs.
The reason a property buyer would employ negative gearing is that the short-term losses can be beneficial to the owner's tax bill in certain instances.Key Takeaways
- Negative gearing is a form of financial leverage typically seen in the context of property investing.
- A negatively geared asset is one that does not produce enough income to cover its cost at the moment.
- An investor who is negative gearing expects to gain from tax benefits in the short term and to eventually sell the asset at a higher price to make up for the initial losses.
- Negative gearing only becomes a profitable venture when the property is eventually sold.
Understanding Negative Gearing
A negatively geared asset is one that does not provide sufficient income to cover its cost. It results in a loss for the asset owner. The benefit to the buyer or investor is that, depending on the investor's home country, the shortfall between income earned and interest due can be deducted from current income taxes.
Countries that allow this tax deduction include Australia, Japan, and New Zealand. Other countries, such as Canada, France, Germany, Sweden, and the United States, allow the deduction but with restrictions. Investing in such a way might make sense in instances where large capital gains are expected at the time of sale, which will recoup intermittent losses.