Everything You Need to Know About Negative Gearing
As the end of the financial year approaches, it is a good opportunity to think about what your investment portfolio might be eligible for like negative gearing.
What is negative gearing?
Gearing is the term used to refer to borrowing money to buy an asset like a property for example. When your property has positive gearing it means the rental income that you generate from your investment property exceeds the interest repayments, property maintenance costs and other relevant expenses. This means negative gearing is when your rental income is less than the expenses and mortgage loan repayments, or in other words when you’re making a profit loss. In this case, you might be eligible for some tax concessions.
Depending on your circumstances, ATO suggests there are different tax-deductible expenses that you could claim:
- Advertising for tenants
- Body corporate fees
- Insurance costs for the property
- Real estate agent fees and commissions
- Home loan interest expenses
- Repairs and maintenance costs
How does negative gearing work?
According to ATO, when your investment property is negatively geared, you might be able to deduct your expenses from your overall taxable income for the year, including rental income and other income sources. As a result, you could potentially pay less tax than you otherwise would, which is why many investors like negative gearing.
Is there anything else I should know about negative gearing?
Experts advise that you shouldn’t rely on negative gearing to reduce your tax every year as this means you might be losing money on your property rather than having an investment property that brings you a stable income. If you believe that the property you’re looking to buy or if the property in your current portfolio already has the potential for capital growth and strong rental yields. Think of negative gearing as a way to recoup a percentage of the money you have lost on your investment property.
Let’s have a look at this example. Would you rather lose $10,000 and the government will give you back $4,700 for your losses or be given $10,000 but give the government $4,700? In other words, investors should also be mindful that an individual’s marginal tax rate impacts the tax benefit received through negative gearing. So if for example, an investor earns $200,000 of taxable income with a $10,000 negative gearing loss, it saves you $4,700 in tax. But if an investor earns $40,000 of taxable income with the same negative gearing loss, it will only save $2,100 in tax.
What does this mean for investors?
Negative gearing can be potentially a good way for investors to grow their portfolios on the provision that properties have capital growth and rental yield. If you have any questions about negative gearing, don’t hesitate to contact your property manager, they might be able to refer you to the right person to talk to.