Property is a popular form of investment that people will use to create an income stream for themselves. This can be in the form of rental or lease income or profits made after reselling the property. A negatively geared property is one in which the income from the property is less than the mortgage or other costs of money used for investment.
Negatively geared property can still make a profit if the value of the asset gains over time so that any capital gain covers the losses made during the life of the investment. It can also be profitable if income increases over time and covers the cost of interest on the amount borrowed for the investment. Interest rates can also reduce and this can lead to the income from rental becoming more than the costs. There are certain investors who will look for the negatively geared property so that it can help them to reduce their tax liabilities by allowing the losses from the property to be offset against their other income.
This approach to investment can be disastrous when property values do not rise, and additionally, in such negative economic scenarios, income from rents is also likely to fall, leading to additional losses. The investor then gets locked into the property investment and must have the capacity to sustain losses till the market situation improves. In such cases, your capital brings you no returns at all, and you will have to keep putting in money till the economic scenario changes for the better. At such times, the investor will have to take a call on whether selling the property at a loss can save him long-term losses.
Buying negatively geared property is good when property values are rising, but you must be prepared for any downturn and be able to ride out the bad times. Taking the advice of experts and fully understanding tax implications can help to take the right decision. Negative gearing makes for over-investment in rental property, which can cause an economic distortion. Property prices go higher and this makes it difficult for people who are interested in buying property for their own use. The idea that tax deductions can be helpful is only for those who have high incomes and are looking to reduce their tax liabilities. You need to have another source of income that can allow you to bear the extra expenses from the negative gearing.