There’s a lot of talk in the business world about “running your property at a loss” just to claim negative gearing. But what does that mean, exactly? And is it something you should be doing with your business? In short, running your business at a loss means operating your business at a net loss. This means that your operating expenses are greater than your revenue. In this video, we’ll discuss what it means to run your property investing business at a loss, and some of the reasons why you might want to do it. There are a few reasons why someone might think this is a good idea. For one, they may believe that they can deduct their losses from their taxes. And while it’s true that you can deduct the business losses on your taxes, are you really losing more money than if you bought a self-sustainable property? So why would you choose this method if you are really losing money? Is it unreasonable to think that you might be running your business at a loss because you don’t have the right systems and strategies in place? Are there other ways to structure your business so that it can run more efficiently, without relying on negative gearing? There are many factors to consider when determining whether or not “running your business at a loss” is the best approach for you. I just want to make this clear that negative gearing is not a strategy but an outcome. Negative gearing is used by investors to minimize their taxable income. It’s achieved by owning an investment property and renting it out for less than the mortgage repayments, insurance, and other associated costs of ownership. The loss incurred each year is then offset against any other income earned, such as salary or wages. Negative gearing explained in simple terms Disclaimer, The figures below are for demonstration purposes only and does not constitute financial advice. We recommend consulting a professional before making any financial decisions. Let’s say you purchase an investment property for $500,000 with a 20% deposit of $100,000. This leaves you with a loan of $400,000. Assuming the interest rate on your loan is 5% and an interest-only loan, your annual mortgage repayments would be $20,000. But that’s not all – you also have to factor in the costs of ownership, such as insurance, council rates, and maintenance. Let’s say these come to a total of $5,000 per year. This means that your total costs of ownership are $25,000 per year ($20,000 + $5,000). And if you’re only able to rent out the property for $18,000 per year, you’re running at a loss of $7,000 ($25,000 – $18,000). The idea behind negative gearing is that the loss incurred each year can be offset against other forms of income, such as your salary. So if you earn $50,000 per year and you make a loss of $7,000 from your investment property, your taxable income will only be $43,000 ($50,000 – $7,000). Now let’s imagine your rent is 25,000 which covers all your expenses. In this case, your investment property is not running at a loss. Though you’re not running at a profit either. So in this instance, you are not going to get any further tax savings as your rent has covered your expenses. So before choosing this approach, it’s important to consider whether are saving $7000 or are you losing $7000 in potential earnings. Running your property at a $7000 loss means out of your wage you are going to have to add an additional $7000 to support the loan and expenses. Let’s imagine that your tax rate is at 50%, using the lesser-rent example of 18,000. Because you have used that 7,000 out of your wage to support the rental property instead of paying tax on the 7000 you have saved 3500 in the tax you would have paid on the 7000. This means that you have saved around 3500 in tax you would have paid, but have you saved 3500 or have you lost an additional 3500 of income? So it’s not unreasonable to think you wasting money to save on tax? Think of it from the perspective of running a business. If your business is making a profit, that’s great. But if your business is running at a loss, it’s not so great. In fact, it’s probably not sustainable in the long term. It’s quite sad to think, that time, and time again professionals or high-income earners will do anything for a tax deduction, yet they would never consider running their business at a loss! Is this a lack of education for high-income earners? Are there professionals like accountants so focused on reducing their taxable income that they forget they are actually earning less money? It’s funny that most people assume because someone is a high-income earner they must completely understand the best ways to reduce their taxable income. Or you go to some random accountant who has never actually achieved anything fantastic themselves and taken their advice and end up losing money. Being a high-income earner, Unfortunately, doesn’t mean you are going to have the education to make the right decisions with your money. There are many professionals that have little or no understanding of taxes and deductions, which leads to them making bad decisions. What are the risks of running your business at a loss? There are a few risks associated with running your business at a loss. For one, it can put a strain on your finances. Is your other income guaranteed? What if you lose your job or have an unexpected medical expense? In addition, running your business at a loss can also lead to burnout. When you’re constantly trying to make ends meet, it can be easy to get overwhelmed and burnt out. This can lead to poor decision-making and can even put your health at risk. So why do people high-income earners, and everyday people get prayed upon? Think about it,…
