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Negative gearing has been getting a lot of air time in the media lately. Some members of parliament have been calling for it to be axed and others insist that it is a vital part of the investment landscape in Australia. As a result of all this media attention, I’ve been getting a lot of questions about negative gearing from young people who are yet to invest in property or shares.
So what exactly is negative gearing? Allow me to demystify it for you…
Negative gearing refers to an investment advisor (property, shares or bonds) that costs more to hold than the revenue it generates.
Here’s an example:
Donna’s annual salary is $100,000 which means tax payable of $26,947 (based on 2015 tax rates)
Donna buys a rental property for $500,000, using $100,000 of her own money and a loan of $400,000.
Income from investment property:
Estimated Rent: $20,000
Expenses associated with investment property:
Agent Fees: $1,540
Council Rates: $1,600
Depreciation: $6,000 (Estimates Vary)
Interest on loan $20,000: (based on 5% Rate)
Land Tax: $575 (in Vic)
Total Expenses associated with rental property: $31,015
Net rental loss: $11,015
Original taxable income: $100,000
Less Rental Loss: $11,015
New taxable income: $88,985
New Tax Payable: $22,651
Tax Saving: $4,296
Out of pocket: $11,015 – $4,296 = $6,719
As you can see from the example above, a negatively geared property essentially reduces your taxable income, which in turn, reduces the amount of tax you pay. It is worth remembering though, that a loss is still a loss and that you always need to enter into an investment with long-term profit gains in mind.