1 in 10 Australians is a negatively geared property investor and 883,325 of the 1.26 million taxpayers claiming benefits from negative gearing earned under $80,000 in 2011-2012. So? So, we should probably know what negative gearing means and how it works!
Whether you’re a seasoned property investor or just about to take the property investment plunge, as an every day Aussie you need to know what negative gearing can do for you.
Investing in property can make you money in several ways. You can make money through capital appreciation (the difference between how much money you owe on the property and its market value) or positive gearing (when your rent exceeds your investment costs). And then there’s negative gearing (when your property costs exceed your rental income). While the first two investment strategies make sense, understanding how negative gearing works is a bit trickier but you can turn a negative into a positive through tax incentives.
What is Negative Gearing?
When you invest in property, you can claim tax benefits on expenses incurred at or for that property. For example, repairs and maintenance, council rates, strata fees and insurance costs may be tax deductible on your rental property. And the interest paid each year is considered an expense, so you can also claim that as a tax deduction.
If a property is negatively geared, it simply means that your expenses on a property are more than your rental income. It means that you are making a financial loss on your investment. But this loss is actually a gain.
When a property is negatively geared it means you can claim the difference between your interest on your loan and your rental income as a loss. This can then be offset against your personal income. What this means is that a portion of your loss is tax deductable against your personal income.
How is this a positive? Negative gearing is a tax incentive for investors. If your investment costs you more than it makes you, the ATO will give you a tax break. Negative gearing of your investment property can work for you, not against you.
Let’s say you buy a property for $300,000. You put $50,000 down and borrow $250,000 from a home loan provider. If the interest on your home loan is 6% a year you will be paying $15,000 in interest. If your weekly rent is $300, you will be receiving a yearly income of $15,600. And let’s say your rates, water, maintenance etc. will cost $3,000. The total expenditure is $18,000 while the total income is only $15,600 so by the end of the year you will be out of pocket $2,400. But remember, it’s not all bad news because negative gearing means you can use it to reduce your tax liability on other assessable income, which means you may pay less tax.
The Final Word
Negative gearing is just one way you can maximise your property investment portfolio. Make sure you select investment property loan products that suit your strategy and personal circumstances and consider chatting to a tax adviser or financial planner for more information. Compare investment property loans, compare rates and additional financial products in line with your investment strategy. Happy investing!