Re: What is negative gearing?
Posted: Mon May 18, 2015 2:21 pm
Hi and welcome to the forums gump.
Negative gearing means you borrow to invest, but in such a way that you make a loss. While you’re at loss, you’re permitted to claim the net loss as a tax deduction against your other income.
To make this more clear, let’s suppose that you’re earning $80,000 a year and you own a rental property. This property is rented at $20,000 a year and you spend about $30,000 in interest and running (maintenance) costs.
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. Your final taxable income will be $70,000.
This reduction means that you’ll be saving 30% 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 $5,000 in depreciation then your taxable income could be reduced by $15,000 (including your rental income of $20,000 and running costs of $30,000).
This way, your taxable income reduces from $80,000 to $65,000, thereby saving you 30% tax on that reduction, being $4,500. So your after-tax loss reduces to $5,500.
Cheers,
Otto
Negative gearing means you borrow to invest, but in such a way that you make a loss. While you’re at loss, you’re permitted to claim the net loss as a tax deduction against your other income.
To make this more clear, let’s suppose that you’re earning $80,000 a year and you own a rental property. This property is rented at $20,000 a year and you spend about $30,000 in interest and running (maintenance) costs.
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. Your final taxable income will be $70,000.
This reduction means that you’ll be saving 30% 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 $5,000 in depreciation then your taxable income could be reduced by $15,000 (including your rental income of $20,000 and running costs of $30,000).
This way, your taxable income reduces from $80,000 to $65,000, thereby saving you 30% tax on that reduction, being $4,500. So your after-tax loss reduces to $5,500.
Cheers,
Otto