Property Investing & Negative Gearing
Australians have a love of property, and purchasing an investment property is a well-established practice towards creating wealth.
What is negative gearing?
When it comes to investing, "gearing" refers to borrowing to purchase an asset e.g. property. Negative gearing is a result of the ongoing expenses of the property (loan interest being the largest), exceeding the rental income of the property. Under the current tax laws, the "negative" amount is claimable as a tax deduction against your other assessable income.
Let's assume you have purchased a property for $600,000 and borrow $500,000 to fund the purchase via an interest only loan at 7%. The weekly rent on the property is $540. Other ongoing expenses are listed below.
Your annual profit & loss statement for the property would be as follows:
In this example, you will be able to reduce your taxable income by $14,920. This would result in an increase in your taxation refund. If your taxable income is normally between $80,000 - $180,000, the additional tax refund you would receive would be $5,820. After taking the tax refund into consideration, an amount of $9,100 ($14,920 - $5,820) is still required each year to pay for the ongoing expenses of this property.
In this example, could you afford to keep up this commitment each year?
Before making a decision to purchase an investment property, appropriate advice should be sought from your tax practitioner to see if "negative gearing" will work for you. Feel free to contact us if you would like to discuss any questions you may have!