08 Jul What’s all the fuss about Negative Gearing?
So, what is negative gearing?
If you buy a house that makes more money (in rent) than it costs (in repayments and expenses), then you can say it’s ‘positively geared’. So your mortgage is paying itself off.
But if the rent doesn’t cover the costs, then you can claim that loss on tax (negative gearing). In the 2012-13 tax year, the average loss on an investment property for negatively geared investors was about $10,000.
You can reduce the amount you can be taxed by $10,000. So if you’re earning $90,000 per year, the amount you pay tax on is $80,000.
There’s quite alot more to it from a taxation point of view including if you pay more than interest on the loan (so some of the principle loan) this can’t be claimed. We also have some clients that are a little surprised as they have been paying off as much as they can on their loan.
Take for example Mr & Mrs Client. Young couple buy their first apartment close to the city when they are both working. They plug everything into their mortgage and decide to start a family. They want to keep their apartment as an investment but realise that the extra monies they have put into the apartment aren’t going to assist them from a taxation point of view. Let’s say they paid $500,000 and have paid off a chunk of their loan, say it’s down to $300,000 now. The property would probably gained in value, but the maximum they can put onto the loan for an investment is the same as it is now – so $300,000. They can change their loan to interest only and pay the bare minimum.
A more savvy way would have been to get some advice and have their loan set up from the beginning as an interest only mortgage with an offset account. They could have thrown all their extra cash into this account, paid less on interest while living there, and still have a substantial loan for when they bought their family home. Plus the cash would have been available in the offset account to have ready for a large deposit for their purchase.
It pays to get the right advice and to know the implications for future investment purposes.