The concept of negative gearing has been originally developed to encourage real estate investment in Australia by allowing any income losses from property investment to be deductible from other income as a tax benefit. This means that the taxable income of the owner will be reduced after the deduction and therefore the total tax payable is also reduced.
In view of the fact that many of the profits from property investments are usually obtained as a capital gains at the time when the property is sold, but do not generate positive cash flow from rentals during the course of the holding period, negative gearing therefore came in to address this issue.
You lose either way
However, the flaw with negative gearing lies in its concept as well. If an investment generates a positive cash flow, the increased income will make the investor liable to pay more taxes as well. In the end, the investor loses either way. If he makes money from positive cash flow, he has to pay part of it off in taxes, while negative cash flow will take money out of his pocket. Therefore, with a negative geared property, it is not possible to get a positive cash flow and pay less tax at the same time.
No guarantees on property value appreciation
Investors who are encouraged to put their money into negative geared property should think twice. As these properties are expected to generate profits only through capital gains, the value in capital gains should then be greater than the total losses incurred over the course of the holding period. However, there is no guarantee that the value of the property will appreciate, or at least appreciate enough to cover your losses. Also, you can't possibly use your expected future profits now as it is not been realized yet.
Beware of attractive property packages
Who gains from this then? Well, investors who are seeking investment property will tend to seek out property developers or sales agents. In order to make a property seem attractive, they are packaged with elaborate financial models with expected returns on investment. However, commissions and profits to the developers have all been packaged into the sale price. With this, investors end up paying premium price for a property with negative cash flow, which is used to pay for hefty commissions to sales agents and developers.
The disadvantage of property depreciations
Another aspect that should be watched out for would be property depreciation for taxation purposes. While it is true that depreciation is applied and is used for tax deductions, however, accumulative tax deductions for depreciation costs on property with appreciating value may cause capital gains taxes to be large. This is because the greater depreciation you apply onto the value of your property, the lower its value will be on paper. Therefore, your difference between the sale price and the book value of your property at the time of sale will be great. This leads to larger taxes imposed onto you.
Do not purchase because of tax benefits
Finally, making a property investment requires careful planning and consideration. Extra caution must be put in especially when a property is projected to generate a negative cash flow. In the end, tax benefits should not the main reason for property purchase. You may end up losing a great deal of money in the end.
For more information, please visit Mortgage Mall Australia.
Naomi Warne of Around the Corner Real Estate Dealers, Sydney, has helped her clients with profitable property investments and numerous tax benefits. Having started as a real estate agent, Naomi has established herself as an analyst and property consultant.
There is an increasing trend in South Africa that is... Read More
What is title insurance and why should any buyer get... Read More
Brazil Property - FortalezaThe PlaceWhat to do in a place... Read More
A Specialist Article For Those Interested In Real Estate Development... Read More
We have been studying a trend of new home buyers... Read More
Most people who complete a self build will go on... Read More
Today we discuss escalation clauses because much of the country... Read More
Waterfront living is among the most desirable of locations in... Read More
For the past several years housing prices have risen dramatically.... Read More
Interior colors are vitally important to selling your home quickly,... Read More
Renters are often in a quandary as to whether it... Read More
Portugal has long been a popular choice for people, particularly... Read More
I invite you to take the next few minutes to... Read More
Is real estate investing only for the wealthy? Can you... Read More
Buying a beach house in New Zealand offers many possibilities.New... Read More
Buying a house in Scotland is slightly different from buying... Read More
It is increasingly common for individuals to own more than... Read More
Are we in a housing bubble? To answer that question... Read More
History repeatedly serves to show us that the real estate... Read More
You could be forgiven for thinking that property is the... Read More
With interest rates at record lows over the past year,... Read More
Did you realise that there is a lot you can... Read More
Of course you're curious, and you'd like to see what... Read More
So you think you might like to buy an old... Read More
Real estate investing professionals look for all possible tax deductions... Read More
Is a sharp correction in store for the real estate... Read More
The Primary Residence taxation, the Residential Replacement Rollover, Sec. 1034... Read More
Given the current interest (dare I say hysteria) associated with... Read More
Learn how to sell your property faster and at the... Read More
Identity theft has been a hot topic in the news... Read More
What if you want better cash flow from your rental... Read More
Real estate appraisal for rental properties isn't the same as... Read More
Where should you invest in real estate? If you know... Read More
We all are thinking about it and some of us... Read More
One of the most important considerations you will need to... Read More
Why commercial property?Compared to residential property investments, commercial property offers... Read More
In rural home purchases, the transaction is often subject to... Read More
Properties for sale or to rent on the Costa BlancaAs... Read More
Buying property abroad is not an undertaking one should embark... Read More
When it comes to buying investment real estate, there are... Read More
Books on real estate are a dime a dozen-and most... Read More
How do you decide whether to sell your home (or... Read More
You hear it asked on the radio, in the newspapers... Read More
To avoid "buying a pig in a poke," buyers have... Read More
Buying and selling property is not as easy as you... Read More
When you are considering purchasing a property; either for investment... Read More
1. Search on the world wide web for distressed or... Read More
Lease Purchasing affords the tenant/buyer a wonderful opportunity to get... Read More
Being a real estate investor is not really that hard,... Read More
Do you need to sell your home quickly? If so,... Read More
Real estate investing is pretty unusual in lots of ways.... Read More
In a previous article we introduced you to the concept... Read More
Moving from one house to another is always a challenge,... Read More
Real estate values rise and fall in cycles. Currently home... Read More
Property Investing Secrets:How to Sell to 100% of the Market... Read More
Those new to real estate investing often fail to take... Read More
Like a monarch, Red Haring reigned in the deep leather... Read More
Our complex IRS code requires that your, as a real... Read More
Hopefully all goes smoothly when you purchase your home. In... Read More
We've all made bad decisions in the past. Don't you... Read More
One of the most effective and frequently overlooked methods of... Read More
Homebuyers and sellers should be aware about issues involving homeowners... Read More
Be a slumlord? Okay, I got your attention, now the... Read More
Buying a house can be a daunting task, even for... Read More
In days of booming real estate, you would think that... Read More
Real estate investing usually begins with the purchase of a... Read More
Real Estate |