A property that is negatively geared can cause problems of liquidity for the owner if there is a cash loss in the early years as well as a tax loss. Current legislation enables you to offset this "loss" against your income from any other source, providing that the property is income-producing and that you intend to earn a positive income from the property eventually. Your other income might be from your salaried job, business, other properties or bank deposits. The loss from your rental properties usually results in a tax refund which lessens the impact of the loss.
It is only sensible to enter in a negatively geared loan arrangement if you have other income which will enable the repayment of the mortgage with financial comfort, or if the tax refunds as a consequence of the loss more than compensate.
Why enter into negative gearing arrangements?
 | to enable you to offset rental property losses against other income and obtain tax refunds. The refunds are at their highest if you are in the highest marginal tax bracket (39c for taxable income over $60,000) as the loss will result in a 39c per dollar of loss tax refund. If you are in the lowest marginal tax bracket (taxable income under $38,000) your tax refund will be based on your marginal tax rate (19.5c or less per dollar of loss tax refund) and therefore your refund will be a lesser figure. |
| to obtain capital gain (which is not taxable under current legislation) with little or no capital input by the investor. |
| to build up a retirement nestegg with little or no capital input by the investor. |
| usually results in a higher return, based on the ratio of capital input to both rental and capital yield, than if the investor contributes a higher amount of capital input him/herself |