Negative Gearing

Negative Gearing Property

Negative gearing property is the term used to describe a situation in which the total expenses you incur on your investment property exceed the total rental income you derive from the property. Positive gearing of a property investment occurs when the income exceeds the expenses.

For most property investors, by far the largest investment property expense is interest on the loan that was drawn down to buy the property. Negative gearing of an investment property allows investors to offset this expense against the income (rental) from that property. Other expenses may include body corporate fees, council rates, cleaning, property management fees, repairs and maintenance costs, etc.

As your annual outgoings to maintain the investment property exceed the rental income you derive from it, you will be making a net loss, which is numerically expressed as a negative figure.

Coupled with the fact that the loss is commonly attributable to interest expenses from borrowings taken out to buy the property (borrowing is also known as gearing), the term ‘negative gearing’ was conceived, which captures the common scenario in which you make an annual net loss on an investment property due to the interest on the loan, but, technically speaking, other expenses may also contribute to this loss.

In particular, the loss may be further amplified by depreciation and capital works deductions, which are not cash outgoings but are nonetheless tax deductible.

What makes negative gearing particularly tax attractive is that the net loss can be offset against other income that would otherwise be included in your assessable income.  Therefore, if a dollar of income would otherwise be taxed at 51.5%, every dollar of negative gearing loss which offsets that income will save you 51.5 cents!

Meanwhile, if the investment property goes up in value but you do not sell the property, no CGT will be payable.  Even if you do sell the property after 12 months, the capital gain will be discounted by 50%.

Accordingly, provided that the total after-tax capital gain on your property and the total tax you have saved from negative gearing exceed your total rental losses during your ownership of the property, you will be in front and make an overall net profit from the property.

In other words, negative gearing may provide significant tax savings that may turbo-charge the return on capital on your investment property.

Having said that, negative gearing is a hotly debated topic in the public space at the moment.  In particular, the opponents to negative gearing argue that negative gearing encourages property investment by providing significant tax perks that drive up housing prices, which is increasingly making home ownership inaccessible especially to first home buyers.

Contact us for a free information pack, or to arrange an obligation free consultation.

Australian Property Investor Planning

Disclaimer

Please read this disclaimer carefully.

Information on this Internet site should not be regarded as a substitute for professional legal, financial or real estate advice. Because every investors needs and financial situations are different, the ideas on this web site are intended as a guide only.

Australian Property Investor Planning and its related entities responsible for maintaining this Internet site and its directors, officers and agents believe that all information contained within this Internet web site is correct. However, no warranty is made as to the accuracy or reliability of the information contained herein and Australian Property Investor Planning disclaims all liability and responsibility for any direct or indirect loss or damage which may be suffered by any recipient through relying on anything contained in or omitted from the Internet site at www.propertyinvestorplanning.com.au

Without limiting the generality of the aforegoing, no person, persons or organisations should invest monies or take other action on reliance of the material contained in this material but instead should satisfy themselves independently (by seeking expert advice or otherwise) of the appropriateness of any such action. Australian Property Investor Planning are not licensed financial advisors. The general information we provide is for educational purposes only. Whenever specific financial advice or financial product advice is required Australian Property Investor Planning refer you to licensed individuals who hold the appropriate licensing required by ASIC.

© Australian Property Investor Planning.

The subject matter on and accessible from the web site www.propertyinvestorplanning.com.au is copyright. Apart from fair dealing permitted by the Copyright Act 1968, Australian Property Investor Planning grants visitors to the site permission to download and display its copyright material only for private purposes. For reproduction or use of copyright material beyond such uses, permission must be sought directly from Australian Property Investor Planning. If given, permission will be subject to the requirement that the copyright owner's name and interest in the material be acknowledged when the material is reproduced or quoted, in whole or in part.