Negative Gearing in NZ
Negative gearing is when an investor borrows money to buy a rental property that brings less income than its expenses. Meaning, the investor will be operating at a loss. Over the years this has been very useful way of avoiding to pay property Tax in New Zealand. Things are going to change from 2019 as the government is looking to implement changes.
How does Negative Gearing work?
An investor borrows money to purchase an asset that has a high capital growth potential, whose rental income is currently lower than its expenses.
This type of investment is most suitable for an investor looking for long term investment as the property takes time to realize significant capital growth.
Changes in 2019
The Government has announced the practice of negative gearing on investment properties will end in 2019. This will affect a lot of rental property investors in New Zealand. More will be announced on how and when this come into effect and how its going to affect the investors.
Pros and Cons of Negative Gearing
Pros on Negative Gearing
Income: the extra monthly income is useful for the investor
Easy access to loan: lenders tend to prefer positively geared property as it accelerates the buying process while eliminating unnecessary delays.
Cons of Negative Gearing
Slow development: negatively geared properties take many years to realize their full potential, hence are not a good option for investors looking for short-term returns.
Negative cash flow: not all investors can afford to suffer the losses attracted by the negatively geared property.
Negative Gearing Property Investment
Some investors argue that it is better to invest in negatively geared property to take advantage of the tax deduction benefits and future capital gains while the investors who are looking for positive cash flow would instead invest in positively geared property which brings in monthly income. The decision to choose either mostly depends on the investor’s financial situation and goals.