As Gearing is the term used to describe borrowing for investments, there are 2 types of gearing
+ Negative Gearing~ means the costs associated in owning an investment property exceed the rental income derived from the property.
+ Positive Gearing~ means the rental income received from the investment property exceeds the finance and ownership of the property, i.e. lender interest and fees, investment property and maintenance costs.
Negative Gearing is not for everyone and is commonly used by higher income earners in entering the property market. The rental income generated by the investment property will not be sufficient to cover the costs associated with financing and maintaining the property.
Yes, in the instance of wealth creation for individual wealth the capital appreciation of the investment property needs to result in an overall gain which will only be assessable on the sale of the investment. In most cases the sale of the investment may be subject to the capital gains tax provisions and therefore be concessionally taxed.
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 $4,687 generated by negative gearing.
Example A.
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Example of Gearing a property |
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$ per month |
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Rental income from investment |
$1,516.67 |
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Less Expenses |
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Less loan repayments per month |
($ 2,333.33) |
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Less repairs, council rates and other maintenance costs |
($ 350.00) |
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Totals |
($ 2,683.33) |
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Shortfall |
$ 1,166.66 |
The above example is based on an Interest Only Interest Rate of 8.00%. The weekly rental amount is at $350/week
Example B.
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$30,000 |
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$25,000 |
$24,682 |
$4,687 |
A saving of $4,687 generated by negative gearing |
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$20,000 |
$19,995 |
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$15,000 |
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$10,000 |
These income tax amounts are combined for example only and have been calculated based on 2010/11 personal tax rates. |
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$5,000 |
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$ 0.00 |
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Without Property Investment |
With Property Investment |
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As a building gets older and items within it wear out, they depreciate in value.
The ATO allows property investors to claim a deduction related to the building and plant and equipment items contained within it. It can be claimed by any owner of an income producing property. This deduction essentially reduces the after tax cost of owning an investment property investors pay less tax.
For more information on property tax deductions please Click Here.
Negative Gearing will differ per client therefore we recommend you always seek Tax Planning and Legal Advice when purchasing an investment.