What is Negative Gearing?

A. Leverkuhn
A. Leverkuhn
Man climbing a rope
Man climbing a rope

Negative gearing refers to a somewhat rare situation where an investor can turn a loss into a small profit by way of a nation’s tax code. Experts call negative gearing a form of “leveraged speculation” that is used in different kinds of investing including real estate. Negative gearing is only possible in countries with a specific kind of taxation system where capital losses work against high taxes for income.

In this scenario, an investor borrows money to buy an asset. The return of that asset does not quite satisfy the interest. Therefore, the investor is left with a capital loss. When that loss is factored into a tax return, it lowers income tax or changes the income tax equation so that, after “taxpayer subsidies,” the small loss is turned into a small profit.

In order for negative gearing to be effective, there has to be a general benefit to operating through capital gains and losses. This kind of tax environment has been reported for the country of Australia. Recent reports do not indicate that this kind of investment outcome is common in the U.S.; in real estate, experts contend that changes to tax codes have “stamped out” negative gearing as a harmful outcome with bad incentives.

Negative gearing is a kind of “geared investment.” Geared investment is similar to what experts call leveraging, where companies or other parties use “good credit” or “debt capital” to invest in debt. Skilled accountants help their clients to use deliberate capital gain and loss outcomes to minimize tax responsibilities and otherwise maximize profits or returns from investments and assets.

When talking about any kind of geared investment, or negative gearing, it’s helpful to understand the particular tax code and industry conventions for the kind of asset or investment that the company or party is making. Stocks, real estate, and other kinds of asset purchases all have their own particular predicted capital gain and loss outcomes based on how the markets work, what trends are at work in the market, and how professional traders and brokers use current regulations to process transactions. Looking at the details of a tax code can give an investor a lot more of a “road map” for finding the most profitable net returns after tax filing.

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