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Conversations with a Pug – How does negative gearing work?

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How does negative gearing work?

You’ve probably heard that Labor is proposing significant reforms to negative gearing in an attempt to make homeownership in Australia more affordable. But what exactly does this term mean?

Well, in this blog we’ll aim to answer this question and more, with the help of our resident property expert Steve Jovcevski. Before we get into the nitty gritty details of negative gearing, we’ve asked Steve to give us a quick definition:

“At its most basic level, negative gearing is when you offset the tax you pay through investment related property expenses. So if you’re making a loss from an investment property and the expenses exceed your income, you may be able to claim a portion of these costs on your taxable income.”

Pretty, simple right? Now let’s move onto some of those FAQ’s…

What can I claim on my investment property?

There’s an endless list of things that can be claimed in relation to an investment property, such as:

  • Interest on your home loan. If your rental return doesn’t cover the interest you’re paying on your mortgage, then you could claim some of the interest you pay. Example time! Let’s say you buy a 1 bedroom apartment in Sydney for $400,000 and rent it out for $350 a week. Each month you will have a rental return of $1,400. But say your monthly interest repayments on your loan are $1,667 (with a $400,000 loan, 5% interest rate and 25 year term), at the end of the year you will be able to claim a portion of that $3,204 loss.
  • Repairs and maintenance. You can also claim the costs of keeping your investment property in good nick. Steve uses the following example: “Say the water pipes burst at your rental property and you need to call in a plumber. A portion of that expense could be claimed come tax time, if your property is negatively geared. But keep in mind, you will need to have a copy of the receipt or invoice, so you can provide evidence in case you’re ever audited by the tax office.”
  • Depreciation on new properties. If you’re purchasing a brand new investment property, you can also claim depreciation on a new property for the first 10 years after it is built. “Just make sure when the property is built you get a quantitative surveyor to come look at the property and create a depreciation schedule for you,” says Steve.
  • Travel expenses. On top of this, you could also claim the costs of visiting your investment property. For instance, if you live in Melbourne and purchase a property in Brisbane, you could claim the return flights – a great way of combining your investments with a much needed holiday!
  • Other costs. There are also a range of other property related costs that can be claimed, including council/water rates and land tax/strata fees, so chat through all your expenses with your accountant to ensure you’re not missing any claimable costs.

Where are negatively geared properties usually located?

According to Steve, you can find negatively geared properties in areas close to CBDs. “As the demand is there, these properties go up in value, which has commonly been blamed for causing housing bubbles in areas like Sydney.”

“Whereas, rental properties that provide cash flow and are thus positively geared are usually found in more affordable areas but where there is less likely to be capital growth,” explains Steve.

Who are negatively geared properties good for?

Negative gearing is a popular choice for high income earners looking to pay less tax, whilst having an appreciating asset in their portfolio. Steve explains in further detail: “You benefit from lowering your tax payable and also enjoy the perks of owning property by potentially seeing capital gains.”

Here’s an example from Steve: Say you spend $15,000 on your investment property over the year, you should be able to get 30c to the dollar back at tax time. “So that’s $4,500 slashed off your taxable income.”

What if I’m on a tight budget?

Steve says it’s wise to get financial advice. “Before you purchase an investment property that is negatively geared, you’ll want to ensure you can reasonably afford the associated costs.” According to Steve these go beyond simply paying mortgage repayments and include things like repairs, council rates, land tax and strata levies.

“While you may be able to claim a portion of the costs at tax time, you’ll still need to be able to afford the ongoing costs that will come out of your pocket over the year,” warns Steve.

Source: Mozo

 

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