Negative gearing basics
It's important to borrow sensibly when looking to negative gear. The more you borrow, the more you stand to gain or to lose.
Many people are attracted to negative gearing because of the tax benefits that it affords. However, remember you can only get a tax deduction if you have a loss on your investment.
Here is an example of how negative gearing works:
Luke buys a unit for $300,000, putting in $50,000 of his own money and borrowing the remaining $250,000. The interest is 7% each year, which works out to be $17,500 and the weekly rent is $300, or $15,600 per year.
The interest amount is higher than the rent received. Remember, you can also claim outgoing costs such as repairs (provided the tenant was living in the property at the time), rates, water, insurance and depreciation.
A good investment must sooner or later show a profit and should also give you a reliable income over time. Eventually it will reduce your losses and you will be expected to pay some tax. Ensure that you get good advice from a financial adviser to ensure that negative gearing is right for you. You also want to ensure that you don't have to manage the investments yourself. This will take a lot of the headache out of things!
Having a good understanding of the tax issues involved in any investment is important. This way, it will also give you a true idea of how much your investment will cost you each year.
As mentioned above, you are able to claim on your items such as loan repayments, strata fees, rates, management fees, maintenance costs and property taxes.
This usually applies when the investment property is ‘negatively geared' and when expenses are greater than the rental income. This results in a net loss that may be offset from any other income, such as your salary, which in turn, helps lower your overall tax bill.
When it comes to tax time, it usually is best if you can find a registered tax agent that can assist you with your tax. Simple tax returns you can do yourself, however when it comes to an investment property or properties, using a tax agent ensures that you will receive the full return that you are entitled to.
You may have seen that time and time again in the media that there has been talk of abolishing Negative Gearing. Is this really the case? No.
In 1985 the Hawke Government attempted to try and abolish Negative Gearing. It meant that people taking positive steps to fund their retirement were unable to recoup any losses and were left out in the dark.
As a result, the rental market virtually closed down! Rents soared, and the cost of renting was unachievable. Investors started dumping their properties and we were faced with a social disaster. Negative gearing was reintroduced in 1987, yet it took several years for investors starting to invest back into the property market. After some time though, the rental market was finally restored.
Given today's climate with a tight rental market and low vacancy rates, abolishing negative gearing would spell disaster. Put simply: it's not disappearing anytime soon!
