What is negative gearing & how can I benefit from it?

Any general questions you might have in regards to loans and finance.
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Otto Dargan
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Re: What is negative gearing & how can I benefit from it?

Post by Otto Dargan »

Hello Lei. Welcome to the forums.

There are a lot of people investing in Australian property and enjoying enormous profits due to capital growth. It helps to diversify their assets portfolio as well.

Negative gearing means essentially borrowing to invest in such a way that you make a loss.You are then allowed to claim this net loss as a tax deduction against your other income.

For example, let’s assume that you are earning $100,000 a year and you own a rental property, which earns you $30,000 a year. You spend about $40,000 in interest and running (maintenance) costs.

In the above scenario, there is a loss of $10,000 incurred from your investment property every year. This loss on your investment property means that your taxable income is reduced equal to the loss amount that you incurred. So, your final taxable income will be $90,000.

Because of the reduction on your taxable income, you can now save 30% on tax, which is equal to $3,000. Your after-tax loss on negative gearing is $7,000 and it is cushioned by the tax reduction you receive.

You may also claim depreciation benefits on the property allowing you to reduce your taxable income further. For example, if you claimed $10,000 in depreciation then your taxable income could be reduced by $20,000 (including your rental loss of $10,000 from above).

Your taxable income reduces from $100,000 to $80,000, thereby saving you 30% tax on that reduction, being $6,000. So your after-tax loss reduces to $14,000.

Cheers,
Otto
Otto Dargan
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P | 1300 889 743
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Otto Dargan
Mortgage Specialist
Posts: 7730
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: What is negative gearing & how can I benefit from it?

Post by Otto Dargan »

Hi Lei,

If you are making a loss on your investment property, then make sure you are saving on tax. Investors often invest in negatively geared property due to the reason that the growth in such property usually exceeds the holding costs.

When you eventually sell the property, you pay capital gains tax on the profit from the sale, however the tax benefits of negative gearing helps you to hold more investment properties without impacting your lifestyle.

We recommend you to obtain financial advice specific to your situation from an experienced accountant or finance professional before making any investment or decision regarding your finances.

If you would like to know more about negative gearing, then you can check out our website or call us directly on 1300 889 743. Else, you can fill in our free assessment form to check if you qualify for a loan or not.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

User avatar
Otto Dargan
Mortgage Specialist
Posts: 7730
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: What is negative gearing & how can I benefit from it?

Post by Otto Dargan »

Hi BiggyLangston,

In general investment loans are considered riskier than standard home loans and to get approved you would need to have a strong financial position. The approval criteria for investment loans are quite complicated when negative gearing benefits are required to prove that you can afford the loan.

To qualify for an investment loan:
  • You need to have saved up at least 5% of the property value in genuine savings.
  • You should have a good credit history without any blemishes on your credit file.
  • Your credit score should be above average.
  • You should have stable employment.
You can also visit our Property Investment Centre to find more information related to property investment.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

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