Negative Gearing?

[Aussie Assault]

Hey guys,

I am trying to get my head around negative gearing and was wondering if someone could explain it in like an "Idiots Guide to Negative Gearing" style so I can better understand it and its benefits?

Thanks in advance

 

[acker]

I will let a more informed accounts minded forumer try to nutshell it for you but add my two bob's worth of a few other things to consider when renting a property out.

Make sure you keep every receipt and invoice you spend on the joint for a start.

Get friendly with some trades people or good handyman types.

A good accountant is worth their weight in gold, particularly at tax time

And a good real estate agent/property manager.

And beware of the final nasty bite on the ass when you sell the property "capital gains tax" (nice to know you have had a capital gain but the tax is often a nasty unwelcome surprise)

P.S People tell me not to rent to relatives and although I never have I think it is sound advice.

 

[Magnum]

I'll explain it as I know, I'm sure there are more consise or accurate ways of explaining.

Negative gearing is when you borrow money to fund an investment where the year to year returns on the investment are less than the cost of interest on the loan.

So if you borrowed $100,000 you might have to pay $8000 back per annum in interest.
If the return on your investment was say 6% per annum that would return you $6000.

So your investment would be 'negatively geared' at $2000 per annum which is 2%

This gap of $2000 is claimable on your tax.

This might sound silly to have something costing you more than it is returning you but usually what happens with property is that the investment property might be returning 6% in rent per annum but also capital gaining 6 or 7% per annum - which is not payable until you sell your property. That can be nasty if not thought about, but is a different subject.

So anyway, a 'negatively geared' property is one that returns you less than you are forking out in interest. And this negative is claimable in tax which makes it attractive to invest considering that there is a 'hidden' capital gain component working for you.


Why it's advantageous to investors, ignoring upfront costs, it might only cost you $5-10000 (after tax) per annum all to own a $400,000 investment property which if kept for 10+ years might have doubled. And slowly but surely your repayments on your property would have it start to return more than what you are paying for the loan (making it positively geared).

From there the added equity can be used to fund futher borrowings and so on etc...

 

[Tim the Toolman]

Add on that any depreciation you will have on the property and this could be ascertained from a Quantity Surveyor and you can claim that as a tax deduction as well.

Then by the time you work out your tax figures you may even have a 'neutral' geared property that is paying for itself whilst it increases in value!

This is why building brand new is worthwhile for some punters. You won't get a better rent in newer areas though.