# Questions on negative gearing



## Tyler Durden (4 August 2011)

Hi, all just some questions have wandered into my mind:

1. Is property the only asset that provides negative gearing?

2. What are your thoughts on a first time property investor choosing a low value property to invest in first (say, $200-300k) as opposed to aiming for the $500-800k category?

3. Is there any relative difference between negative gearing for a $300k property and a $800k property?


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## Julia (4 August 2011)

Tyler, what do you see as being the advantage(s) of negative gearing?

Ditto the disadvantages?


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## Tyler Durden (4 August 2011)

Julia said:


> Tyler, what do you see as being the advantage(s) of negative gearing?
> 
> Ditto the disadvantages?




My financial situation is reaching the stage where I'll be paying tax on top of the tax already withheld, instead of getting a refund.


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## Garpal Gumnut (4 August 2011)

Julia said:


> Tyler, what do you see as being the advantage(s) of negative gearing?
> 
> Ditto the disadvantages?




Once you have your house paid off negative gearing is a good way to use other peoples money to build wealth.

Risk does increase, but so do rewards.

It is not for everybody, and many make their small fortune by not doing so.

gg


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## Tysonboss1 (4 August 2011)

Tyler Durden said:


> My financial situation is reaching the stage where I'll be paying tax on top of the tax already withheld, instead of getting a refund.




So, you want to lose $1 so you don't have to pay 50c tax on it, Makes sence.

The first thing you should be thinking about planning an investment operation that is going to be profitable, then decide whether it will be profitable enough that it is worth borrowing money at interest to expand it.

Once you get to this stage then you can think about the tax advantages.


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## bellenuit (5 August 2011)

Tyler Durden said:


> 1. Is property the only asset that provides negative gearing?
> 
> 2. What are your thoughts on a first time property investor choosing a low value property to invest in first (say, $200-300k) as opposed to aiming for the $500-800k category?
> 
> 3. Is there any relative difference between negative gearing for a $300k property and a $800k property?




1. No, any investment can be negatively geared. Take shares for example. If you borrow $20K to buy $30K of shares and you pay 10% interest on your borrowings, so $2K per year interest. If dividends from those shares are just $1k pa, then you are negatively geared. I am ignoring imputation credits to keep things simple.

Any investment where the total income from the investment is less than the total holding costs of the investment is negatively geared. It will only make sense to negatively gear if the investment appreciates in value (capital gain) by more than the difference between income and costs of the investment. 

2. It depends on the current state of the market and most of all your ability to service a loan for the more expensive property. If the market is going sideways for a few years, then you are better off not buying anything than being negatively geared. 

If property is appreciating faster than the cost of holding the property (interest + other expenses - rent) then the greater the value of the property the better off you will be. However, if the market turns and property appreciates less than holding costs, then you obviously lose more on higher valued properties. 

Since selling a property adds additional costs, buying the more expensive property will be riskier as you may not be able to service the shortfall and thus be forced to sell. With the less expensive property, you may be able to ride out the storm and hold the property until things improve.

3. The main difference is your holding costs are higher because of the interest paid. As in 2) above, your gain will be better for the higher valued property if property value appreciates faster than holding costs, but losses will be greater if otherwise.


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## Tyler Durden (5 August 2011)

Tysonboss1 said:


> So, you want to lose $1 so you don't have to pay 50c tax on it, Makes sence.




If there is capital appreciation, then yes.



bellenuit said:


> 1. No, any investment can be negatively geared. Take shares for example. If you borrow $20K to buy $30K of shares and you pay 10% interest on your borrowings, so $2K per year interest. If dividends from those shares are just $1k pa, then you are negatively geared. I am ignoring imputation credits to keep things simple.
> 
> Any investment where the total income from the investment is less than the total holding costs of the investment is negatively geared. It will only make sense to negatively gear if the investment appreciates in value (capital gain) by more than the difference between income and costs of the investment.
> 
> ...




Many thanks


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