Which of the following Debt Coverage Ratios (DCR) would provide the greatest negative gearing in a property investment? a. 1.2 b. 1.1 c. 0.9 d. 1 e. 0.8

Understanding Negative Gearing

Negative gearing in property investment occurs when the costs of owning a property exceed the income it generates, leading to a loss that can be used to offset tax liabilities. The Debt Coverage Ratio (DCR) is an important measure in this context, as it indicates how easily a property can cover its debt obligations through its operational revenue.

Analysis of Debt Coverage Ratios

1. What DCR Represents: The DCR is calculated as: $\text{DCR} = \frac{\text{Net Operating Income (NOI)}}{\text{Total Debt Service (TDS)}}$ A DCR of less than 1 indicates that a property's income is not sufficient to cover its debt obligations.

2. Options Breakdown:

   • a. 1.2: Suggests that the property can cover its debt by 120%. This indicates a positive cash flow.
   • b. 1.1: Indicates a DCR of 110%. Still shows a positive cash flow, though less pronounced than 1.2.
   • c. 0.9: Indicates a DCR of 90%. This implies a negative cash flow and is more geared towards losses.
   • d. 1: Represents a break-even point. Income exactly equals the debt obligation.
   • e. 0.8: Indicates that only 80% of the debt obligations can be covered by the income, leading to a significant negative gearing situation.

Conclusion

The option providing the greatest negative gearing would be the one with the lowest DCR, which indicates that the property’s expenses surpass its income significantly, leading to a higher loss that can be used for tax deductions.

Final Answer

The greatest negative gearing is provided by option e. 0.8.