Negative gearing is an option you may want to consider if you have money to invest.
With correct financial advice and with the selection of the right property, negative gearing may be a tax efficient investment strategy. That's great if you're thinking about entering the property investment market for the first time or want to increase your investment portfolio.
|What is negative gearing?|
Negative gearing is when the costs of owning a property – interest on the loan, bank charges, maintenance, repairs and capital depreciation - exceed the income it produces.
Negative gearing works not only for property, but may also work for shares and bonds.
|Investment expenses that you can claim as a deduction|
Property owners may be entitled to claim deductions and depreciation against rental income on the property depending on their circumstances. There are three main classes of deductions that may be available to property investors:
1. Revenue deductions
Examples of these include interest on the loan as well as ongoing maintenance and recurrent expenses such as agent’s fees, council fees, advertising charges, bank fees, body corporate fees, cleaning expenses, gas, water, gardening and insurance.
2. Claims for capital items
Large capital items such as a hot water service, white goods, etc are subject to depreciation. If the owner is entitled to a tax deduction, this means the owner must claim the cost over a number of years rather than all at once. Depreciation schedules are set by the Commissioner of Taxation and range from a few years to more than 20 years.
3. Claims for building allowances
Owners may also be entitled to claim depreciation of capital works, specifically for building. The current rate is 2.5% over 40 years.
|Risks associated with negative gearing|
There is an inherent risk associated with borrowing to fund an investment. While negative gearing can help you increase your gain on borrowed funds, the losses can be large in adverse circumstances.
As a general rule, only investors with the financial capacity to absorb the effect of potential falls in investment values, as well as an increased cost in interest payments, should consider negative gearing.
You can minimise the risk of gearing by:
This example shows how an investment asset may be negatively geared.
Rental income on investment property
$2,000 per month
Expenses (interest, maintenance etc)
($2,500) per month
Council rates and other expenses
($100) per month
$600 per month
You can also positively gear a property. This occurs when the investment income exceeds your interest (and other possible deductions) expense.
Note that you may be subject to additional tax on any income derived from a positively geared investment.
You should consult your tax advisors/accountant or financial advisor before launching into a negative or positive gearing investment strategy.
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