In real estate, negative gearing is when the cost of buying and maintaining an investment property is higher than the income you gain from it. With this loss, it is then possible to offset the income you earn thereby allowing you to pay less tax on the property.
For a rental property, for example, negative gearing occurs if the rental income is less than the interest on your loan and the expenses you incur in maintaining the property. The result is net rental loss.
You can, however, benefit from this loss as you can offset it against your income derived from other sources. This means you can pay less tax at the end of the financial year. There is also a chance for investors to profit from this negative-geared property when its value increases in the long term.
How Does It Work?
In terms of taxes, property owners can claim a deduction for the expenses they incur in managing and maintaining their property. This includes the interest on their mortgage loans.
Basically, there are three categories of claim deductions they can consider. The first is revenue deductions which covers the interest on loans and property maintenance fees. The second is capital items or large items such as a dishwasher in their rental property subject to depreciation over time. The third is building allowance which covers the depreciation for building works over time.
While these and other expenses and costs can be claimed on your tax return, it is a good idea to consult with a financial planner or tax accountant to determine which of them you are eligible to claim against your negative-geared property.
In Australia, thousands of investors have been using negative gearing to take advantage of a short-term loss and tax deductions. This is despite reports stating that this method only encourages people to avoid taxes and destabilises the economy as investors apply for more loans. However, this can also be considered a good investment strategy particularly for people who know how to carefully choose a property investment suited for them and those who are financially capable of absorbing the losses or increasing interest payments in the long term.
If negative gearing is the strategy you prefer, it is important that one has a steady and reliable source of income and cash flow to manage their investment notably when circumstances change during times they least expect them.
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By Wendy Chamberlain
Copyright 2018 | All Rights Reserved
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With a passion for all things real estate spanning over 20 years, Wendy loves that her role as a Buyers Agent or Sellers Advocate gives her buying and selling clients an experienced voice they can trust when it comes to negotiating to buy or sell something as important as their home or investment. Wendy considers it a privilege to be asked to help others realise such an important goal as home ownership and to be trusted with that honour. Get in touch today via www.wendychamberlain.com.au for a no obligation chat about how Wendy can work with you and help you save time and money to secure your new home sooner.