Getting negative gearing explained to a first-time investor can be a complex topic, but understanding it is crucial for anyone considering property investment in Australia. If you’re looking to grow your wealth, negative gearing might be a strategy worth exploring. We’ve written this guide with the basics to start you on your informed property investment journey. Read on to learn what is negative gearing and how it works and then book a chat with us to see how we can help you.
What is Negative Gearing?
Negative gearing occurs when the costs of owning an investment property, such as mortgage interest, council rates and property management fees, exceed the rental income generated. In essence, you’re making a loss on the property each year. However, this loss can be claimed as a tax deduction, reducing your taxable income. You still need to cover the costs of your investment during the year when they are due. The benefits many home investors receive are at tax time when using those costs helps reduce the tax they owe. Savvy investors use the tax savings in one financial year to help with the costs in the coming year.
How Does Negative Gearing Work?
The concept might seem counterintuitive, but how negative gearing works is relatively straightforward. By claiming the property’s losses as a tax deduction, you reduce your overall taxable income. This means you owe less tax. While you’re not making a profit from the property in the short term, the hope is that the property’s value will increase over time. This potential capital gain can offset the losses incurred through negative gearing.
Negative Gearing Explained: A Real-World Example
Let’s look at a hypothetical example of negative gearing.
Scenario
- You purchase a property for $500,000.
- You borrow $400,000 with interest-only repayments of $24,000 per year.
- You rent the property for a rental income of $20,000 per year.
- Other expenses (rates, body corporate, property management, repairs) total $8,000 per year.
Calculations
- Rental income: $20,000
- Expenses:
– Interest: $24,000
– Other expenses: $8,000
– Total expenses: $32,000 - Negative gearing loss: $32,000 – $20,000 = $12,000
In this example, you have a loss of $12,000 on the property. However, this loss can be claimed as a tax deduction, reducing your taxable income by $12,000. If your marginal tax rate is 32%, this equates to a tax saving of $3,840.
Important Notes
- This is a simplified example and doesn’t account for all potential costs or income.
- Tax laws and rates can change.
- Negative gearing is a long-term strategy and property values need to increase to offset the ongoing losses.
Key Takeaways: Negative Gearing Australia
Negative gearing is a popular investment strategy in Australia. However, it’s essential to remember that negative gearing is a long-term strategy. It’s not a guaranteed path to wealth, and there are risks involved.
It’s crucial to seek professional advice from a mortgage broker like SCF Solutions to understand if negative gearing may suit your financial situation and investment goals. It’s essential to seek professional advice tailored to your specific circumstances so you can make informed decisions that work for you.
Would you like to know more about the potential benefits and risks of negative gearing? Or perhaps you’re interested in learning about other property investment strategies? Let us know!
Meet Chris Wilson, the heart of Sunshine Coast Financial Solutions (SCFS). With over a decade of experience in finance, Chris started his journey as a broker with Aussie Home Loans in 2009. His dedication earned him the title of Rookie of the Year in 2010. By 2011, he was ready to build a business based on trust and strong partnerships.
