Make Money from your property investments and reduce tax
Gearing basically means borrowing to invest. Negative gearing is when the costs of investing are higher than the return you achieve. With an investment property, thats when the annual net rental income is less than the loan interest plus the deductible expenses associated with maintaining the property (such as property management fees and repairs).
When youre negatively geared you can deduct the costs of owning your investment property from your overall income reducing your tax bill. High-income earners benefit the most, because theyre in the top tax bracket.
In addition, while you record a loss on the income from the property, in theory capital gains in the value of your property should make the investment worthwhile.
But dont over-commit to property just to get a tax deduction. Those tax benefits generally don’t come until the end of the financial year and you have to make your mortgage payments in the meantime.
That said, you can apply to have less tax deducted from your pay to take into account the impact on your overall income of expected losses on an investment property.
Say you earn $45,000 a year, gross, in your day job but you can reliably estimate that you’ll make a $15,000 loss on an investment property. You can apply to have your tax payments calculated on an income of $30,000 rather than $45,000 giving you more cash in hand now, rather than a refund at the end of the year. Get your sums wrong, though, and youll owe the tax man money at the end of the year.
See www.ato.gov.au for information about pay-as-you-go (PAYG) withholding payments.
Remember, too, that a capital gain which will be taxed is never assured. Whats more, the benefits of negative gearing are smaller when interest rates and inflation are low and can be offset by charges such as the land tax levied in NSW (see www.osr.nsw.gov.au).
The owners of investment properties can also claim depreciation of items such as stoves, refrigerators and furniture. That involves writing off the cost of the item over a set number of years the effective life of the asset.
The ATO sets out what it considers to be appropriate periods. The cost of a cooktop, for instance, is generally written off over 12 years you claim one-twelfth of its cost as an expense each year.
There are two different types of depreciation an allowance for assets such as the cooktop, and an allowance for capital works, such as the cost of construction.
Its a good idea to talk to a quantity surveyor or other depreciation specialist right from the start, so you make full and correct use of the available depreciation allowances.
The higher the depreciation bill, the higher the amount to offset against income when youre negative gearing.