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Re: What is negative gearing?

Posted: Mon May 18, 2015 2:21 pm
by Otto Dargan
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

Re: What is negative gearing?

Posted: Tue May 19, 2015 11:17 am
by Otto Dargan
Hi gump,

That’s a good question. As you pointed out, if you are making a loss on your investment property each year then sure you’re saving on tax, however you are still losing money! The reason that investors often invest in negatively geared property is that the growth in the property usually outstrips 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.

If you would like to know more about negative gearing or capital gains tax then you can check out our website. We can also be reached on 1300 889 743 or you can fill in our free assessment form to see if you qualify for a loan or not.

Cheers,
Otto

Re: What is negative gearing?

Posted: Wed May 20, 2015 11:47 am
by Otto Dargan
Hi orru,

You’re absolutely right. Positive geared investment properties are beneficial to investors.

While most investors rely on the capital gain to make a profit and pay off their investment loan as soon as possible, some hold their properties for long term in which case the properties often become positively geared.

This happens because the rent increases over time however the loan amount does not, so eventually the rent income is more than the holding costs of the property.

Some investors buy properties with exceptionally high rent returns which means they are positively geared from day one. In some cases these properties experience lower capital growth.

If a good property is picked then it may be possible to get the winning combination of a high growth rate and a high rental return.

Although positively geared properties do not have the same tax benefits of negatively geared property, keep in mind that the goal of investing is to make a profit, not to avoid tax.

For this reason positively geared properties are excellent investments if they also have high capital growth.

Cheers,
Otto