Negative Gearing

Negative gearing means gearing your investment so that the costs to maintain it (loan repayments, yearly investment costs and expenses) outweigh the income produced, leading to a reduction in taxable income. In other words, negative gearing happens where the total yearly costs of any investment outweigh the total income and you are allowed to claim a loss against income earned elsewhere.

The ultimate aim for most smart investors being a portfolio of positively geared properties. Initially however, it is through negative gearing and the associated tax benefits that investors are able to purchase real estate at minimal cost to themselves.

The difference between the amount of rent from your property and the expenses related to the property are (assuming there is a loss) tax deductible. There is also provision for non-cash expenses, for example depreciation on items such as light fittings, carpet, building costs, etc. which may increase your available deductions.

The important words are "Tax Deductible". Below is an overview of these deductions and how the investor is able to take advantage of them to create their own real estate portfolio.

Deductions on Purchasing Costs

·         (Tax deductible over 5 years)

·         Valuation Fees

·         Stamp duty on Mortgage

·         Bank Application Fees

·         Mortgage Insurance

·         Consultancy Fees

Depreciation Costs

·         Building Costs (2.5% p.a. over 40 years)

·         Fixtures & Fittings

·         Furniture

·         Inspection Costs

·         Other acceptable costs (as per tax schedule)

Calculation of depreciable items is very specialised, the above figures are indicative only, Leader Property Group recommends that the services of a Quantity Surveyor be used to ensure you maximise your depreciation deductions. Investors should also use an accountant who specialises in property investment to ensure all tax deductible items are claimed.

There are many factors to consider when selecting your property and one of them is new or existing. The answer is NEW. This is to maximise your tax advantages and to reduce the out of pocket costs to yourself to fund the property.

Positive Gearing

Positive gearing occurs when the income on an asset you invest in exceeds the expenses. For property this would occur if you purchased a property which had a high yield for your purchase price. With interest rates coming lower, and so reducing the yearly costs of holding an investment property, and with rents coming under pressure in many areas and so increasing, more incidences of positive gearing are being seen and some people who initially negatively geared are seeing these properties now returning a positive income.

In conclusion...

To encourage the private sector to invest in property for rental, governments have made available extremely viable tax incentives for the investor.

It is through these available tax incentives that investors are able to purchase property at very little cost to themselves and in many cases at virtually no cost to themselves.

Simply put: the tax man and the rental income pays for your investment property!!

More information on gearing and property investment, including negative, neutral and positive gearing, speak with one of our property advisers today.