Negative Gearing: A Comprehensive Guide to Its Legal Definition
Definition & Meaning
Negative gearing refers to a financial strategy where an individual borrows money to purchase an asset, typically real estate, but does not earn enough income from that asset to cover the associated costs, such as interest payments and maintenance expenses. This situation often arises in rental properties, where the rental income falls short of the costs incurred. Investors may find negative gearing beneficial if the asset appreciates significantly in value, resulting in capital gains that exceed the accumulated losses over time.
Legal Use & context
Negative gearing is commonly used in real estate investment and can have significant tax implications. In legal practice, it is relevant in areas such as tax law and real estate law. Investors may utilize legal forms and templates to document their borrowing agreements, rental contracts, and tax deductions related to their investments. Users can manage these transactions themselves with the right tools, such as those offered by US Legal Forms.
Real-world examples
Here are a couple of examples of abatement:
Example 1: An investor buys a rental property for $300,000, financing it with a loan. The property generates $20,000 in annual rental income, but the total costs (mortgage interest, property taxes, maintenance) amount to $30,000. The investor experiences a $10,000 loss annually, which may be used to offset taxable income.
Example 2: A person purchases a property for $500,000, expecting its value to rise. They incur $25,000 in costs but only receive $15,000 in rental income, resulting in a $10,000 loss each year. If the property appreciates to $600,000 in five years, the investor may realize a profit that compensates for the losses (hypothetical example).