A guide to negative gearing

Negative gearing is a common tax strategy used by property investors to offset the costs of owning a property against assessable income.

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The strategy is arguably one of the most generous tax breaks available to Australian property investors. It allows investors to claim the shortfall between a property’s associated expenses and its rental income as a deduction against their total taxable income – resulting in a lower annual income tax bill. Where the other income is not sufficient to absorb the loss it is carried forward to the next year.

To access negative gearing on a property, the for this visa will pay a levy; generating revenue for the Skilling Australians Fund which will replace the existing unsuccessful training benchmarks. The Skilling Australians Fund assists financing apprenticeships and traineeships while allowing for employers to meet critical needs for their businesses where Australian skill sets are not available.To access negative gearing on a property, the owner must have borrowed money to purchase the property and the net rental income must be less than the costs of maintaining the property.

For example, if the rent of a property was $500 per week, and the property was fully tenanted for a full financial year, the rental income would be $26,000. If the deductible expenses for that year were $40,000, the net rental loss would be $14,000. The $14,000 loss can then be applied to reduce the property owner’s taxable income.

Although negative gearing is helpful for those owners experiencing a net rental loss, the strategy is not without flaws. An underperforming property is still making a loss, and ideally, investors would prefer to have a positively geared property where rental income exceeds expenses.

Investors who have long term negatively geared properties are generally hoping to incur long term profits from capital growth. Even if you think that your investment property will be positively geared, understanding the benefits of negative gearing can give you a little peace of mind knowing that if the property does lose money, you will be able to offset the loss against your taxable income.

When a property is positively geared, the income earned is added to your total taxable income. As such, it is taxed at your marginal tax rate. The same applies to any capital gain that you make from selling a property.

If you have any queries please do not hesitate to contact our office on (03) 9728 1448.

Many thanks,

TAS Tailored Accounting Solutions

This publication is for guidance only, and professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.

 

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