Negative gearing has risk

Auckland accountant and tax specialist Nigel Smith of NSA says he agrees broadly with de Roos' theories, but disagrees with some details.

He is particularly concerned about de Roos' recommendations about negative gearing, which he sees as potentially risky for some people, as well as his recommendation that people can buy at any stage of the real estate cycle, which he questions.

"The good part is that de Roos is encouraging people to save, but the bad part is about over-gearing," Smith says.

Negative gearing is where you borrow money to buy an income-producing investment and where interest and other costs exceed the income derived from the investment.

The aim is for a tax-free capital gain to be made which exceeds the loss incurred each year. Interest and other costs incurred in servicing debts used to finance income-producing assets are normally tax-deductible in New Zealand.

But negative gearing is not for everyone, Smith emphasises.

"Gearing is a strategy for those people on a high taxable income who are seeking worthwhile capital gains which exceed after-tax losses," says Smith. "But people thinking of negative gearing should remember to ensure they can fund all outgoings in the worst-case scenario of no income being received."

NSA