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What is negative gearing?
By Banker | January 23, 2009
Have you ever heard of a kind of leveraged speculation in which a borrower borrows money to purchase an asset but then falls short of earning through that? This is because his mortgage is higher than revenue generated through the asset. This is known as Negative gearing. It’s the opposite of positive gearing where you are geared to make profit out of your asset.
Negative gearing has a salvaging factor. Sometimes, government gives a tax rebate or altogether exempts speculative losses. With negative gearing you can only come out of the deficit hole, if the asset climbs the price ladder in a windfall way. Then the capital gain can account for the cumulative speculative losses piled over years.
Many countries do not consider the process of seeking deductions legal and consider a negative gearing a manipulative way to acquire rebates from the government. In countries that permit it, a buyer can fetch a tiny profit after subsidies from the taxpayer’s side.
Topics: Personal finance, Personal Tax | No Comments »