Negative Gearing Explained

How Negative Gearing affects your Investment Property Returns

Imagine you have a household income of $100,000, bought a $440,000 property and took out a $400,000 loan at an interest rate of 7%. The annual interest payable on the loan would be $28,000.

Also, imagine that you are earning $430 per week in rent, which adds up to an annual rental income of $22,360.

Based on the above example, you are paying $28,000 in interest but only earning $22,360 in rent which means there is a shortfall of $5,640 per year.

That’s the bad news.

The good news is that the property should be going up in value and it is worth more as time goes on.

Let’s say you bought in the right postcode and the property went up in value by 10% in a year, it has increased in value by $44,000.

At the end of Year 1, you would have paid out $5,640 in interest.

But…

The property has increased in value by $44,000, which means that you could be $38,360 richer than you were 12 months ago.

Our Negative Gearing Calculator lets you get a guide as to the potential tax benefits and cash flow projection of a negatively geared residential investment property.

Use the calculator to work out the profit or loss from your investment property as well as your tax refund from negative gearing.

What is Negative Gearing

Negative gearing is a tax rule that allows investors to claim losses experienced by their assets as a tax deduction.

As it relates to rental properties 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.

Many financial advisers will say that while the tax rule is available to other investments it is primarily used for property.It allow you to go into what would otherwise be a negative cash flow investment.Negative gearing does mean you are losing money.

The only way it makes sense is if the asset you hold is increasing at a rate that’s preferably multiple times the rate you are gearing.It does allow you to go into what would otherwise be a negative cash flow investment.

See the ATO explanation here.

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 you are gambling on a potential capital gain that will ultimately be worth more than a definite loss of income.

How does it work?

Interest on the investment loan is fully deductible.

So, even 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.

The Advantages & Disadvantages of Negative Gearing in Australia.

There is a lot of confusion as to what Negative Gearing actually is, how it works, who benefits and why.

We help you to better understand the concept of Negative Gearing so that you can 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 form of investment to help general people be an active part of the growing real estate industry.

We help you to hold your investment property for its value to appreciate so that when the time is right your investment can be directed to generate high capital gain in short span of time.

You may be able to claim some added tax deduction benefits with respect to:

Purchase Costs.
Loan application fee.
Property valuation fee.
Other expense related to the property purchase.

Depreciation Includes:

Investment property building costs (2.5% pa over 40 years)
Permanent fixtures and fitting
Furniture’s for tenants.
Other depreciable items allowed

Property

Interest paid on your investment loan
Real Estate Agent’s property management fees.
Travel to inspect property locations.
Body corporate fees.
Other property related expenses.

At BAA Property, we help you to maintain a negative gearing tax potential so that you can afford your dream investment. In other words, you pay less than 25% of the expenses and the rest is paid by both the taxman and the tenants.