Negative Gearing is a common term used by many investors , for some it's part of their financial strategies to have more then one negative geared home under their portfolio because of the tax advantages you claim at the end of the financial year. But having a negative geared investment doesn't work for everyone and it could make you worst off in the first few years, so read more before you jump the hot guns of the elite - property investors.
Negative gearing occurs when you borrow to invest in an income producing asset ( for our purposes; A investment property) and the cost of borrowing exceeds the returns (income) from that asset.
Put simply, a common negative gearing example is when:
1. You borrow money from the bank to acquire an property ---- > $400,000
2. You receive rent of $300/week = $15,600 per year -------------> $15,600
3. The interest you pay for your loan ( note: interest only, not principle), and other cost; such as insurance, repairs, agent fee, rates and renovation --------->$25,600
4. So with this investment property you made a lost of $10,000 ($15,000 - $25,600), thus reducing your taxable income by this amount, and hopefully taking your tax bracket to the next level down.
The list is endless! check with your tax professional. But the most common items are:
Name - Peter
Status- Unit bought to be rented out as investment.
Purchase - $400,000 Unit in Parramatta NSW, Unit was built in 2007, 2 bedroom.
Rent after 6 month - rented out for $390/week
Mortgage - Had 10% deposit - borrowed $360,000 @ 6.76% - monthly repayment of $1,900
Assumption- 1st year:
Scenario 1 - Income- $60,000 a year - taxable income 30% ( bracket 2) - Tax payable - $11,500
|interest on mortgage||$19,000-|
|Strata + council rate||$3500-|
|Depreciation + Other cost||$15,000-|
|Total cash Flow||$17,220-|
So now the new taxable income is $60,000 -$17,200 =$42,800 - so tax payable - $6,330 SAVING: $5,170 in tax
As you can see by buying this investment home peter was able to save over $5,000 in tax, so that's an extra $5,000 saved toward buying his next investment home.
It's worth while to note, the tax payable on the next tax bracket (over $80,000) is an extra $12,450 base tax PLUS extra 7% ( 30--->37%).
Imagine if peter received a pay raise of $90,000- with this strategy in place he would have been pushed back down to the lower tax bracket saving him thousands!!
This topic is covered in a lot of details in my previous blog titled "Negative Gearing- wealth creation". But in summary, usually property that are negative geared has the highest potential of capital gain (land value usually), so in effect you might be losing out in your weekly rent compared to your monthly mortgage repayment. But with the tax benefit and capital growth in the long run you should be better off.