Negative gearing is a hot topic again. It seems like every time there’s a whisper of potential changes to property tax laws, negative gearing takes centre stage. (Perhaps it would help their branding if they just called it “net rental loss” – less ominous, right?)
But what does it actually mean? And more importantly, is it the right strategy for you? In this first blog of our three-part series, we’ll break down the basics of negative gearing and explore how it can impact your tax situation.
What is Negative Gearing in Australia?
Simply put, negative gearing occurs when the costs of owning an investment property outweigh the rental income it generates. Think of it like this: you’re spending more on the property than you’re earning from it. These costs include things like:
- Mortgage interest: This is often the biggest expense.
- Property management fees: If you use a property manager.
- Maintenance and repairs: Keeping your property in good condition.
- Council rates and insurance: Ongoing costs of property ownership.
Positive vs. Negative Gearing: What’s the Difference?
Negative gearing is the opposite of positive gearing, where your rental income exceeds your expenses. With positive gearing, you’re making a profit from your investment property. There’s also neutral gearing, where your income and expenses are roughly equal.
See this visual example:
How Does Negative Gearing Affect Your Taxes in Australia?
Here’s where it gets interesting. With negative gearing, the loss you make on your investment property can be offset against your other personal income, such as your salary, interest, trust distributions, dividends, etc. This reduces your overall taxable income, and therefore, the amount of tax you pay.
Important Note: This applies when you own the property as an individual. If you own the property through a trust or company, the tax implications are different.
Example of Negative Gearing vs Positive Gearing:
Let’s use this table as a visual guide:
In this example, we have three scenarios:
- Salary Income Only: You earn $130,000 per year and $32,448 is withheld from your salary by your employer. Assuming no deductions, you receive a small refund of $60 when you do your tax return.
- Salary Income + Negative Gearing: You still earn $130,000, but now you have an investment property. It generates some rental income, but the costs to own and maintain it result in a net rental loss of $18,000. This loss is deducted from your salary, reducing your taxable income to $112,000. Because your taxable income is now lower, you pay less tax and receive a larger refund of $5,820.
- Salary Income + Positive Gearing: In this case, your investment property generates a net rental income of $15,000, increasing your taxable income to $145,000. As your taxable income is now higher, it results in a larger tax bill of $5,440.
Important Note: This example, and indeed this blog, primarily focuses on the tax effect of negative gearing. It’s crucial to remember that property investment involves much more than just tax implications. Factors like your investment goals and cash flow should all be considered.
What Deductions Can I Claim with Negative Gearing?
When you’re negatively gearing, it’s important to maximise your deductions. Here are some common expenses you can claim:
- Interest on your loan
- Property management fees
- Council rates and water charges
- Body corporate fees
- Insurance premiums
- Repairs and maintenance
- Depreciation: This is a non-cash deduction that allows you to claim the decline in value of your property and its assets over time. It’s a significant tax benefit that many investors overlook.
Understanding Property Depreciation and Negative Gearing:
Property depreciation is a powerful tool for investors, especially those who are negatively geared. It allows you to claim a deduction for the wear and tear on your property, even though you’re not actually spending any cash on it. This can significantly reduce your taxable income and boost your tax refund.
You can read this article for more details.
How NexGen Business & Tax Services Chartered Accountants Can Help with Your Property Investment Strategy:
Navigating the world of negative gearing can be complex. At NexGen, we can help you:
- Understand your eligibility for negative gearing.
- Run the numbers on the potential investment properties that align with your goals.
- Maximise your tax deductions, including depreciation.
- Develop a long-term investment strategy that incorporates negative gearing.
- How to borrow to maximise your interest deduction.
Not only that, but we also offer a comprehensive review of your prospective property investment. We’ll provide insights into how rental income and expenses will influence your tax position in the years ahead, ensuring you make informed decisions that align with your goals.
Stay Tuned!
In our next blog, we’ll explore the pros and cons of negative gearing and discuss why focusing solely on tax benefits can be a risky strategy. We’ll also explore alternative investment approaches that may be more suitable for your individual circumstances.
