Buying an investment property has been a popular wealth building strategy for lots of people for many years. Once they have owned their home for a while and their equity in it has built up due to the loan reducing and the value rising, buying a second property makes sense.

Or at least it did. The property related costs plus the interest on the loan to buy it were tax deductible against the rental income. If those expenses exceeded the rental income the loss was deductible against salary or other income. It was a good way to reduce tax on one’s salary.

That is no longer allowed in relation to existing properties. Any such loss can be carried forward for future use but cannot be claimed immediately as a deduction against salary. The deduction is still allowed if the property is new. However competition for new properties has risen strongly.

Importantly, this ban on negative gearing only applies to existing residential property, not other investments. Negative gearing losses can still be claimed on investments such as commercial properties, shares and managed funds. 

Some people keen to build wealth may like to buy a small commercial or industrial property. That can work well if the tenant is strong and reliable.

Negative gearing using managed funds may be the best option available now for many wealth builders. Money can be borrowed against the investor’s home to buy the funds. Some banks will also lend against the value of the new investments as well.

Bank loans are available at close to standard mortgage interest rates. Margin loans are also available that don’t require property as collateral. They lend against the funds or shares. Interest rates are 2 to 3 per cent higher, but the interest is tax-deductible, reducing the net cost.

Managed funds pay income distributions at varying rates, sometimes quite high, so it is best to reinvest them if possible. This will grow the investment value much faster.

Managed funds can be bought in smaller parcels with borrowings increased to buy more over time, unlike properties that require a very large loan initially. Loans for funds can also be reduced easily if circumstances change, such job loss or time off work for children. They are flexible.

Managed fund investments fluctuate more in value than residential property, but if the wealth building plan is over a long term that shouldn’t be a problem. Any negative gearing losses remain deductible against salary and dividends often carry some imputation tax credits.

People put off negative gearing of property should consider using the strategy with other investments.