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Why People Love Negative Gearing (but should you ?)

Love Negative GearingDespite much public debate (and dare I say ‘hype’) around negative gearing it may be a worthwhile exercise for some.  Did you know that despite the common misconception that this is for the ‘wealthy’, 56%* of the Australians that take advantage of negative gearing, earn $80,000 and under ?

So before you take someone’s advice at a BBQ , or maybe you just want to get a basic handle on it, read on…..

Chances are that if you want to buy an investment property you will be borrowing to do it.  We know that Banks being the commercial enterprises they are will charge you interest on the amount you borrow. You are also going to have associated costs with owning the property.

All of this adds up to the ongoing costs of holding your investment.

Quite simply if the expenses** for holding your property are greater than the income (rent) received, the property is deemed to be ‘negatively geared’.

You don’t have to be Einstein to work out that effectively, this means the property is making a loss.  That ‘loss’ may then be able to be used to reduce your taxable income.

Here’s a basic example:

  • You buy an investment property for $350,000
  • You borrow $315,000 (with the help of your awesome finance broker), together with your own funds to pay for it.
  • Let’s assume an interest rate of 5% on that loan which would equate to $15,750 a year.
  • The rent on the property is $280 per week or $14,560 per year (fully occupied for 52 weeks)

Whilst only slightly, the property is making a loss of $1,190 per year. This amount plus any other allowable expenses, is what could be used to reduce your tax bill.

Now, as with any investment, there are benefits and downsides. Remember that loss – has to be actually paid for (by you). It always makes sense to look at what this would mean for you with your income, rather than ever taking someone’s word for it.

Always, always check with your accountant and/or advisor or at the very leastsomeone independent of the property purchase on how any individual property relates to your situation.

For further general information head to ASIC’s  MoneySmart site. Or if your question relates to borrowing you can email me at samantha@thriveinvestor.com.au

**For a full worksheet from the ATO, click here.

*Australian Negative Gearing %

This post was originally published on LinkedIn

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