Negative gearing

Negative gearing

Negative gearing is a form of leveraged speculation in which a speculator borrows money to buy an asset, but the income generated by that asset does not cover the interest on the loan (Interest > Income). In a few countries the strategy is motivated by taxation systems which allow deduction of ongoing speculative losses against highly taxed income, but tax capital gains at a much lower rate. When income generated does cover the interest it is simply geared investment which creates a source of passive income.

A negative gearing strategy can only make a profit if the asset rises so much in price that the capital gain is more than the sum of the ongoing losses over the life of the speculation. The speculator must also be able to fund the planned shortfall until the asset is sold. The different tax treatment of planned ongoing losses and possible future capital gains affects the investor's final return. This leads to a situation in the countries which tax capital gains at a lower rate than income. In those countries it is possible for a speculator to make a loss overall before taxation, but a small gain after taxpayer subsidies.

Deduction of negative gearing losses on property against income from other sources for the purpose of reducing income tax is illegal in the vast majority of countries, the exceptions being Canada, Australia, and New Zealand.[citation needed]

See also

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