Negative Gearing

AAA

DEFINITION of 'Negative Gearing'

Borrowing money to buy an investment asset without receiving enough income from the investment to cover the interest expenses and other costs inolved in maintaining it. 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 Canada, Australia and New Zealand.

INVESTOPEDIA EXPLAINS 'Negative Gearing'

Negative gearing most often occurs in rental properties, where the rental income received isn't enough to cover the interest costs on borrowings plus expenditures toward property maintenance and upkeep.

Negative gearing only becomes a profitable venture when the property is eventually sold, and a prerequisite is that property values are rising, not falling or holding steady.

Many investors who speculate this way will purposely seek out negative gearing for the tax deductions in the hope that they will make a profit when the property is sold for a capital gain.

Investors considering this type of arrangement need to have the financial stability to fund the shortfall out of pocket until the property is sold and the full profit can be reached. Also of utmost importance is that the interest rate is locked in from the beginning or, if the borrower's interest is calculated on a floating index, that prevailing rates remain low.

RELATED TERMS
  1. Gearing

    The level of a company’s debt related to its equity capital, ...
  2. Investment Real Estate

    Real estate that generates income or is otherwise intended for ...
  3. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  4. Passive Loss

    A financial loss within an investment in any trade or business ...
  5. Speculative Risk

    A category of risk that, when undertaken, results in an uncertain ...
  6. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
Related Articles
  1. Tax Tips For The Individual Investor
    Retirement

    Tax Tips For The Individual Investor

  2. Tax Deductions For Rental Property Owners
    Taxes

    Tax Deductions For Rental Property Owners

  3. Simple Ways To Invest In Real Estate
    Home & Auto

    Simple Ways To Invest In Real Estate

  4. Introduction to Margin Accounts
    Active Trading Fundamentals

    Introduction to Margin Accounts

comments powered by Disqus
Hot Definitions
  1. 80-10-10 Mortgage

    A mortgage transaction in which a first and second mortgage are simultaneously originated. The first position lien has an ...
  2. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific ...
  3. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  4. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  5. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center