The example below illustrates the benefit for an investor as the indicative deductions incurred exceed the income derived therefore the shortfall may potentially be used to reduce the tax payable on other assessable income. This example below does not include any long term building depreciating values in the calculations and each client should seek advice from qualified Quantity Surveyors to maximise their property investment potential depreciation deductions.
We’ve put together a simple example of Victoria & David who wish to purchase an investment property and take advantage of the gearing tax benefits.
Victoria’s annual salary is $55,000 and David’s salary is $65,000 a combined salary of $120,000 per annum with a combined tax of $24,682 (David tax $14,022 & Victoria tax $10,660).
Victoria and David invest in a property and after calculating income less costs (See example A) the investment property generates a loss for the year of $13,799.92 ($13,799.92 divided by 2 = $6,999.93) which will reduce Victoria and David’s taxable income by approximately $6,999.93 each, reducing their combined income from $120,000 to $106,000. On this amount they expect to pay a combined tax of $19,995 that equates to a saving of $4,687 generated by negative gearing.
Example A.
Example of Gearing a property
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$ per month
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Rental income from investment
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$1,516.67
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Less Expenses
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Less loan repayments per month
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($ 2,333.33)
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Less repairs, council rates and other maintenance costs
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($ 350.00)
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Totals
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($ 2,683.33)
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Shortfall
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$ 1,166.66
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The above example is based on an Interest Only Interest Rate of 8.00%. The weekly rental amount is at $350/week