Understanding Negative Gearing in Property Investment.

Negative gearing is a term used to describe the situation where the costs of owning an investment property outweigh the income it generates. This can occur when the property is purchased with borrowed funds, and the net rental income – after deducting expenses like maintenance, insurance, and property management fees – is less than the interest on the borrowings.

The net loss from the investment can be claimed as a tax deduction, reducing the owner’s overall taxable income. This is because the Australian Taxation Office (ATO) allows property investors to offset the losses incurred from negative gearing against their other income, such as salary, wages, or business income, in the same tax year. If the losses exceed the income earned in that year, they can be carried forward to the next tax year.

It’s important to note that negative gearing is not a tax loophole, but rather a legitimate way for investors to reduce their tax liability while building their property portfolios. However, it’s not always a profitable strategy, as it relies on the assumption that the property’s value will appreciate over time.

If the rental expenses claimed in a tax return result in a tax refund, property owners may be able to reduce their rate of withholding tax to better match their year-end tax liability. This means they can have more cash flow during the year, rather than waiting for a lump sum refund at tax time.

Is Negative Gearing Right for You?

Negative gearing is a strategy used by property investors to reduce their taxable income by offsetting losses from their investment property against their other income. However, it is not suitable for everyone and is commonly used by higher income earners who are looking to enter the property market.

To negatively gear a property, the rental income generated by the investment property must be lower than the costs associated with financing and maintaining the property. This means that the property owner is making a loss, which can be used to offset their other income and reduce their tax liability.

Negative gearing can be a risky strategy, as it relies on the property’s value increasing over time to offset the losses incurred in the early years of ownership. As such, it is generally considered to be a long-term investment strategy that requires careful planning and management.

If you are considering negative gearing, it is important to seek professional financial or accounting advice to ensure that it is the right strategy for your financial situation.

We are Neomoney can assist you structure the credit advice.

How to Use Negative Gearing for Wealth Creation Through Investment Properties.

Negative gearing can be a powerful tool for wealth creation through investment properties. It is a strategy where the rental income from the investment property is less than the expenses associated with owning and managing the property. The difference between the two, the “negative gearing loss,” can be claimed as a tax deduction against the investor’s other income, such as their salary or wages.

In the context of wealth creation, negative gearing can provide significant tax benefits by reducing the investor’s taxable income, resulting in a lower tax bill. However, it’s important to note that negative gearing alone does not guarantee wealth creation.

To create wealth through negative gearing, investors must also focus on capital appreciation. This means that the value of the investment property needs to increase over time, resulting in an overall gain when the property is eventually sold. Any gains made from the sale of the investment property may be subject to capital gains tax, but there are often concessions available that can reduce the amount of tax owed.

It’s also important to carefully consider the risks associated with negative gearing. For example, if the rental income from the investment property decreases or interest rates rise, the investor may end up in a negative cash flow situation, where the expenses associated with owning the property are greater than the rental income received.

The Benefits of Negative Gearing for Property Investors: An Example.

Negative gearing is a tax strategy commonly used by property investors in Australia. Essentially, it involves borrowing money to buy an investment property and using the rental income to pay off the mortgage. If the rental income is less than the cost of owning the property (including mortgage repayments, maintenance costs, and other expenses), the investor can claim the loss as a deduction against their taxable income. This can reduce the amount of tax they have to pay on other income.

Let’s take a look at an example to illustrate how negative gearing works. Victoria and David want 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, for a combined income of $120,000 per year.

After purchasing the investment property and accounting for income and expenses (see example A in the table below), the property generates a loss of $13,799.92 for the year. This loss can be split between Victoria and David, reducing their taxable income by approximately $6,999.93 each. As a result, their combined income drops from $120,000 to $106,000. This reduction in taxable income results in a combined tax saving of $4,687 generated by negative gearing.

It’s important to note that this example does not include long-term building depreciating values, and each investor should seek advice from a qualified Quantity Surveyor to maximize their property investment potential depreciation deductions.

Understanding Property Tax Deductions for Investment Properties.

Yes, as a property investor, you can claim a tax deduction for the depreciation of your investment property. Depreciation refers to the decrease in value of a building and its contents as they get older and wear out.

The Australian Taxation Office (ATO) allows property investors to claim deductions related to the building and the plant and equipment items within it. This deduction can be claimed by any owner of an income-producing property and helps to reduce the after-tax cost of owning an investment property, thereby lowering the amount of tax you pay.

However, negative gearing will differ for each client depending on their individual circumstances. We strongly recommend seeking tax planning and legal advice before purchasing an investment property to ensure you are aware of all the tax implications and obligations that come with it.