Gearing is when you borrow money to invest in a property.
A property is negatively geared when your rental return is less than your outgoings and interest. If your property is negatively geared you are possibly eligible for a tax concession.
Why Use Negative Gearing
The key benefit to using negative gearing, is that you can deduct the net loss on a rental property from your taxable income. Using negative gearing tax concessions can help you to minimise any losses while waiting for long-term capital gain.
Is negative gearing an effective tax strategy?
To evaluate if negative gearing is effective for you, firstly you need to carefully assess your rental income, property related expenses, taxable income and capital growth prospects. It is advisable speak with a trusted financial advisor before deciding on the your investment strategy
The purchase price is your starting point. It is important to buy well and not over-pay. Your purchase price directly governs your capital and interest payments.
Your rental income is a vital factor in calculating your negative gearing deductions. You need to be competitive with your rent whilst covering your costs. Quite often a balancing act! Remember that your home loan repayment isn’t the only cost of owning a rental property.
Expenses to Consider
Negative gearing allows you to deduct the expenses of maintaining and renting out your property. These expenses may include:
- Repairs and maintenance (Plumber, Electrician, Handyman)
- Renovation costs
- Pest control
- connecting utilities and services
- Finding new tenants (advertising)
- Land tax & Council rates
- Accountant’s fees
- Legal fees & Insurance
- Strata and body corporate fees
- Damages if you have problem tenants
Not every cost associated with the upkeep of you rental property can’t be deducted all at once. These items are depreciated over a number of years.
This is where a good accountant / financial advisor is important. Generally speaking item that are covered by depreciation are items that you have purchased specifically for your rental property that decrease in value over time.
You can also claim deductions for improvements that you have carried out on the property. This may also include capital works (construction costs) – Important to get professional advice.
You can only make money from negative gearing if your long-term capital growth is greater than the loss you make from rental.
It is important to seek the advice of a professional financial adviser, tax agent or accountant.