An Introduction To Negative Gearing
As one of the most commonly used tax planning strategies for property investors, negative gearing provides a unique opportunity that can often translate as borrowing to invest.
As a general rule, people invest in property to make money, and so making a loss is never ideal. However, if you’re a property investor in Australia - or looking to become one - it’s important to understand what negative, positive and neutral gearing is, and the possible benefits and risks that come with each.
Understanding How Negative Gearing Works
Generating wealth through property investment can be approached in a number of different ways. If the rental property in question is positively geared, what this means is that the income earned from renting the property is more than your expenses. In simple terms, positive gearing is when investors make a profit directly from the rent generated from the property in question.
In contrast, negative gearing is the term used when any expenses that a rental property incurs are higher than the actual income earned from it. However, this isn’t necessarily a bad thing, as the Australian Tax Office treats any expenses incurred by property investors as tax deductible, just like they do for other business costs.
Aside from the wealth of tax benefits that negative gearing has the potential to offer, many investors purchase properties to generate wealth from its long term capital growth, instead of short term rental income. If they are able to successfully negatively gear the property, they have an asset that not just pays for itself, but also as a way to limit their losses until the time comes to sell and ideally make a sizable profit.
An Example Of Effective Negative Gearing
Given the current state of the national property market, it’s unlikely that there have been too many properties that have been negatively geared with interest rates so low and rents quite high. Although tax depreciation is likely the only way that investors are booking a tax deduction this year, a simple example of how negative gearing can be applied is outlined below.
Let’s say that an investor purchases a property for $440,000, and takes out a $400,000 home loan at an interest rate of 7%. The annual interest payable on the loan is $28,000. In line with the market, the investor charges his tenants $430 per week in rent, which adds up to an annual rental income of $22,360.
Based on the above figures, the investor is paying $28,000 in interest, but only earning $22,360 in rent - equating to a rental a shortfall of $5,640 per year. In this example the investor is making a loss and their property is ‘negatively geared’. The investor can legally offset this amount against their taxable income, reducing it by $5,640. As a result, they would pay less tax, while the property continues to grow in value.
Ultimately, successful property investing is all about building a diverse portfolio. To get the balance right and mitigate any potential risks, partnering with a Buyers Agent is a must. As the ultimate buyers advocate, a Buyers Agent represents the best interests of investors at all times, and provides unparalleled industry knowledge and access in order to make sound financial decisions for the long term.
Meet Your Property Investment Buyers Agents
Between sourcing the right property, scheduling appointments, and trying to find the time to liaise with the relevant industry professionals, it’s no secret that buying property can be a stressful experience - but the good news is it doesn’t have to be.
With offices based in Brisbane and on the Sunshine Coast, Quantum Buyers Agents are giving buyers the edge that they need to secure their ideal property. We partner with buyers to ensure that they have access to the market intelligence needed to successfully secure the right property at the right time, while removing the stress linked to the process. Get in touch with us today to discuss how we can help bring your property vision to life.