NEGATIVE GEARING CHANGES
Negative gearing usually offers a wide range of benefits to many investors, but one sure thing about it is that it surely comes with embedded risks and that’s why you first need to understand what is negative gearing in New Zealand. Actually, the government of New Zealand made an announcement earlier on and declared that the practice of negative gearing on investment properties will come to an end in 2019.
HOW DOES IT WORK
Negative gearing is where you borrow money to buy an income-producing investment. The income-producing asset is normally tax-deductible in New Zealand. If the rental income after subtracting the expenses is considered less than the interest on the borrowed funds, then a certain investment property is considered to be negatively geared.
Thus, the rental loss significantly arises as an outcome of a negatively geared property in New Zealand. Property investment is a very powerful means for creating wealth due to leverage. But negative gearing in New Zealand also has its own benefits, let’s have a look at some of the pros and cons of negative gearing of property in New Zealand;
Pros and Cons of Negative Gearing
PROS OF NEGATIVE GEARING
Enhances capital growth
This simply means that you are able to secure property in high capital growth areas if you are a proper investor who has a deep knowledge of the market. Positive cash flow properties can also acquire capital growth, but the problem remains that they are a little bit much harder to find. You’ll eventually realize that obtaining those capital growths will further allow you to generate more money in capital growth than you are spending through the losses of your property in New Zealand.
Opportunity for development
When you invest in positive cash flow properties, it will only limit the places and areas that you can purchase from. But on the other hand, you can readily develop one property into multiple properties or land into a development asset with negative gearing properties
Potential tax savings
Every penny that you considerably loose in an investment property can also be effectively claimed simultaneously against the money that you normally earn from your job and that’s why it is best to seek a professional opinion when claiming anything to do with tax.
CONS OF NEGATIVE GEARING
In general, negative gearing of property in New Zealand isn’t the best investment strategy if you don’t have that much money to spare and if you want to create an influx of passive income.
You find yourself too reliant on market fluctuations and also on capital gains thus losing the concept of making any money if the market is considered stable or going down. That shows that one of the cannons of a negatively geared property in New Zealand which can lead you to be completely reliant on capital gains.
Due to the fact that you are milking money out of your pocket every single month in order to pay for the property, you eventually find yourself limited to how many properties you can buy and still afford to live. This shows that the lack of serviceability may hinder you from developing a large investment portfolio.