Negative Gearing allows investor to claim investment related deductible costs. When expenses occur more in terms of the income received from that investment, investor can use this loss against their other income to obtain tax benefit.
The most common form of negative gearing is a rental property, but negative gearing can also be associated with shares and managed funds in the form of margin loans.
Example: You decide to buy a rental property as an investment for negative gearing purposes. You have financed the property through an investment loan with the bank. In the first financial year you earn $10,000 through rental income, while you have paid $14,000 in interest on your bank loan, as well as $1,000 in agent commissions, $1000 on council rates, $500 on repairs and $500 on water rates related to the property. Your total expenses ($17,000) exceed your total income ($10,000) on your investment.
In the short term, any losses (i.e. the $7,000 loss in the example above) can be offset against your taxable income and is there as a tax benefit. In the long-term, your investment, if successful, is there to rise in value and make a capital gain.
There is no surprise that in this country, with the increasing prices of the Australian property market, that negative gearing in the form of investment properties is highly popular and a growing trend.
However, investors must understand that there are many risks involved in negative gearing, and that is where we, as accountants are here to assist. Remember, despite a house expected to generate a gain in value, it doesn’t always happen.
We can give you appropriate tax advice and also consult with experienced property and share investment advisors. We are here to ensure you have the right knowledge to assist in your planning, and then help you through the growth of any investment.
Unsure of what income and expenses you should bring in for your appointment?
Please feel free to refer to our Rental Property Checklist.