As prices rise in many suburbs across the country, negative gearing is back in the media spotlight. Some see this tax as a helping hand to investors, encouraging independent wealth creation. Others believe negative gearning causes investors to flood the market and thus acts as a barrier to first home buyers buy artifically inflating the cost of housing.
To individual investors, the most important question is whether negative gearing fits within their investment strategy. With the right planning, a negatively geared property can become a positive for the investor’s bottom line.
How negative gearing works
Negative gearing is a tax policy that allows investors to deduct their investment losses from their taxable income.
“Negative gearing is effectively saying that you’re running the investment at a loss, and then that loss is offset against the income you earn for that year,” the Property Investment Professionals of Australia (PIPA) chair Ben Kingsley says.
This tax write-off applies to virtually all investments funded by borrowings, AMP chief economist Shane Oliver explains.
“It applies to all aspects of negatively geared investments, whether it be residential property, commercial property, shares, you name it,” he says.
Negative gearing is often used when a investor’s rental returns are insufficient to cover the property’s mortgage repayments.
The investor might collect $10,000 a year in rent, but spend $25,000 on interest, maintenance and othe costs. If they earn $100,000 a year, negative gearing would allow them to reduce their taxable income to $85,000, potentially earning them a sizeable tax refund.
This write-off can minimise losses on the investment to a substantial degree, Mr Kingsley says.
Alternatively, he suggests investors apply to the Australian Taxation Office (ATO) for an income variation. This allows investors to forecast losses on the property for the year and reduct teh tax payable on their weekly or monthly income.
A number of expenses can be taken into account in calculating the total cost of the property, according to Mr Kingsley, but he says the process isnt’ always simple.
Claimable expenses might include property management fees, repairs and maintenance costs and lender’s mortgage insurance in the first five years, he explains. However, due to the complicated regulations involved, Mr Kingsley urges investors to seek professional help when taking this approach.
“The only person you can talk to in regards to tax advice and the tax implications of this matter is a licensed tax agent,” he says
Negative gearing was introduced into the tax framework to reduce the cost burden of investing, Mr Oliver believes.
“It makes logical sense in that servicing a debt that relates to investment is part of the cost of investing, therefore you should be able to reduce your taxable income by that amount.” he says.
In his view, the policy lowers the expenses associated with investing, thereby encouraging more people to invest.
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Smart Property Investment Plus , 27 October 2015,