Buying a rental property? Creating wealth through property investment is a very popular way to secure your financial future
What is Negative Gearing?In its most simplistic form, negative gearing for investment housing allows investors to deduct their losses against their personal taxable income. These losses may occur when the investor incurs costs such as interest on a home loan as well as maintenance and other small expenses on an investment property. However, it is important to note that negative gearing is not unique to the property asset class; it also applies to businesses and shares in Australia. The most important thing to realise about asset negative gearing is that it is fundamentally off-setting a loss. Although you can claim that loss on your tax return, the investor must carry the cost of that loss throughout the year. Ultimately, when investing, most purchasers would be hoping that rental rates increase over time and result in the asset moving from a loss-making one to an income producing one. Cameron Kusher – RP Data senior research analyst.
The Video series provided highlight various tax tips and address some of the issues to think about when buying a rental property. If you own a rental property, or are thinking of buying one, this series of short videos will help you understand your record-keeping and tax obligations.
The videos discuss some of the tax issues that you will came across when buying, owning, and selling a rental property.
To place some of these rules into perspective use our simple Negative Gearing Tax Simulator to determine how much an investment property could be costing you after expenses. Please read the Disclaimer and Disclosure below before using this simulator.
The information provided is general in nature only and does not constitute personal financial and tax advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. You should consider whether the information is appropriate to your needs and seek professional advice from a financial adviser or tax accountant before making any investment decisions. These results are not intended to imply any recommendation or opinion about a financial product as Birkenhead Point Real Estate does not hold an Australian Financial Services License. You should undertake independent advice in pertaining to your particular and individual financial and credit circumstances before making any investment or property purchasing decisions.
Negative Gearing With Property
There are only two things that are certain in this life: Death and Taxes- says the old adage. How true! We have a duty and responsibility to pay taxes so that the revenue collected goes back into our communities for better infrastructure, amenities and other public services. We all work for up to four months of the year for the tax office and the remaining eight months for ourselves!
The government however, does offer investors the opportunity to legitimately minimise the amount of tax that we pay every year. Using the concept of negative gearing when purchasing a property for investment purposes can help minimise your tax liability. As an investor you are entitled to claim all the interest on money borrowed when acquiring income producing assets such as property.
It is a condition of tax law that an asset must produce income in order to qualify for tax deductions. Gearing is a term meaning that you are borrowing in order to invest. There are two types of gearing:
- Negative Gearing: Occurs when the expenses from the investment exceeds the actual income derived from the investment. Deriving a financial loss is essentially termed negative gearing.
- Positive Gearing: Occurs when the income from the investment exceeds the expenses incurred from the investment
Holding the investment at positive gearing actually increases your assessable income hence, increasing your tax payable every year.
In the case of negative gearing the actual loss incurred from the property can be offset against income from all other sources including your salary. A negatively geared property will generally give you 3 main benefits:
- Minimising your overall tax liability
- Potential capital growth (increasing value) from the property over time
- Your property gradually being paid off by the tax office (by way of tax deductions) and your tenant (by way of rental income).
It is true that investing in property can help you create wealth over time however; you must always be aware that there are potential risks associated with investing and with property is no exception.
You must undertake due diligence when selecting the right property. It is very important to familiarise yourself with the Property Buying Process and how to select a Property Growth Location.
Minimise the risk of things going wrong follow our 5 Biggest Home Buying Mistakes guide.
Australian Tax Office Definition of Negative GearingA rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings. The overall taxation result of a negatively geared property is that a net rental loss arises. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income (such as salary, wages or business income) when you complete your tax return for the relevant income year. Where the other income is not sufficient to absorb the loss it is carried forward to the next tax year. If by negatively gearing a rental property, the rental expenses you claim in your tax return would result in a tax refund, you may reduce your rate of withholding to better match your year-end tax liability.
Useful related Tax Office information
For further information relating to your entitlements please refer to the Australian Taxation Office website. You should always consult your accountant or financial planner before making any investment decision.
Australian Tax office – information for individuals
The Australian Taxation Office official website that provides information on income tax for individuals and businesses with rules concerning negative gearing – http://www.ato.gov.au/individuals/
Individual income tax rates (ATO)
See a list of the current income tax schedules – https://www.ato.gov.au/Rates/?sorttype=SortByTopic&marketsegment=Entire%20website
The key to investment property ownership
Find out about investment property-related tax information – make sure you keep adequate records when claiming expenses – https://www.ato.gov.au/General/Property/Residential-rental-properties/Obtaining-and-owning-a-rental-property/
Residential related expenses that you are entitled to claim under ATO rules
You can claim a deduction for certain expenses you incur for the period your property is rented or is available for rent – https://www.ato.gov.au/General/Property/Residential-rental-properties/Expenses-you-can-claim/?anchor=P632_46409#P632_46409
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