Negative Gearing. Positive outcomes in simple, plain english.
Can you please help me understand negative gearing?
Negative Gearing is a tax rule that allows investors to offset income (i.e. rent) against expenses (i.e. interest, depreciation, etc.) and to claim the loss in cash flow experienced by their investments as a tax deduction. And as such, obtain a form of income for the investment as a tax return on taxes already paid to the investor in other forms of income such as a salary.
The Australian Tax Office states:
“A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.”
This tax ruling is available to other investments; it is primarily used for property. It makes sense if your asset increases in value at a rate, preferably multiple times the rate you are gearing. It does allow you to go into what would otherwise be a large negative cash flow investment.
The Truth about Negative Gearing in Australia.
We help you better understand the concept of Negative Gearing to make an informed decision.
Negative Gearing occurs when an investor borrows funds to acquire any assets, but the return on the investment fails to exceed the cost of borrowings. It is a leveraged investment to help general people be active in the growing real estate industry.
We help you hold your investment property for its value so that when the time is right, your investment can be directed to generate a high capital gain quickly.
How negative gearing creates positive outcomes.
Imagine you have a household income of $100,000, bought a $680,000 property and took out a $544,000 loan at an interest rate of 6%. The annual interest payable on the loan would be $32,640.
Also, imagine earning $550 per week in rent, which adds to an annual rental income of $28,600.
Based on the above example, you are paying $32,640 in interest but only earning $28,600 in rent, which means a negative cash position of $4,040 per year before tax returns are lodged.
Lets us remind you that the expenses on the property, such as interest and other expenses, can be claimed as an expense against your wage. If we assume your tax rate at 30%, a tax rebate of $5,500+ will offset any out-of-pocket expenses and can create positive cashflows.
The better news is that the property should be going up in value and worth more as time goes on.
Let’s say you bought in the right postcode, and the property went up a mere 3% in a year; it has increased by $20,400.
At the end of Year 1, you would have made $1,460 in positive cash flow.
And also, The property has increased in value by $20,400, which means you could be $21,860 richer than you were 12 months ago.
That’s great news! But it’s only a very general explanation of Negative Gearing.
You can see the potential for increased positive income with extra tax benefits by utilising positive cash flow alongside Negative Gearing. This projection demonstrates the positive cash flow of a negatively geared residential investment property.
How does it work?
If the rent you make on the property in the first year leaves you a couple of thousand dollars short, you can “save” money off your tax bill by deducting the interest spent from your total earnings (salary, wages and rental income).
In other words, with a negatively-geared investment, you make a cash loss, but the effects of this cash loss are buffered or absorbed by the taxman. Because of the tax effects, your loss is reduced.
Negative gearing & tax benefits.
The Australian Taxation Office allows investors to offset an income loss incurred on a real estate investment against another form of income.
An income loss is where the property costs are higher than the rental income from the property. You might still be out of pocket, but the upside is that you favour a potential capital gain that will ultimately be worth more than a definite loss of income.
You may be able to claim some added tax deduction benefits for:
Purchase Costs include:
- Loan application fee.
- Property valuation fee.
- Other expenses related to the property purchase.
- Investment property building costs (2.5% pa over 40 years)
- Permanent fixtures and fitting
- Furniture for tenants.
- Other depreciable items allowed
Property Expenses include
- Interest paid on your investment loan
- Property management fees.
- Body corporate fees.
- Garden or other maintenance.
- Other property-related expenses.
Are you ready to unlock the potential of negative gearing?
Our comprehensive whitepaper/brochure provides in-depth insights into the world of negative gearing, helping you understand its benefits, risks, and how it can fit into your property investment strategy.
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