What is negative gearing and how does it work on tax?

Negative gearing is the key when starting with real estate investment in Australia, so getting to grips with it is vital. In this blog, we will define negative gearing, show why it is important for investment properties in Australia, and explain how knowing it can be of help to you as an investor. Whatever the level of your investing experience is, from being a beginner to just starting to explore the property market, knowing the fundamental principles of negative gearing is necessary for making knowledgeable decisions and increasing your investment opportunities.

What is negative gearing?

Gearing is the process of taking a loan, and when the property is bought with the borrowed money, the income from the asset is less than the expenses incurred in owning it. To figure out the negative gearing in a rental property, all the costs, like mortgage interest payments, maintenance costs, insurance, property management fees, and other expenses connected with the property, are subtracted from the total rental income that is received. If the result is negative, it means that there is negative gearing. Taking guidance from the best tax accountant in Perth to calculate negative gearing, while considering the various claimable expenses involved. 

Advantages of Negative Gearing

At first glance, it seems like a company run at a loss is not a good idea at all, but of course, there are also some pros of it. On the one hand, positively geared properties will benefit from negative gearing, while at the same time, negative gearing also has its advantages. Tax benefits from negative gearing can be utilized to offset the loss suffered on other taxable income; thus, your overall tax bill may be lower. Furthermore, you can control your cash flow by changing your PAYG withholding with the ATO through the outcome of your rental property. If you want to have personalized advice that is correlated with your financial goals, you should contact the best tax accountant or a mortgage broker in Perth to talk more about your finances.

Why is negative gearing popular?

Tax exemption on a loss earned for a year is the most common choice of property investors thanks to the attractive short-term advantages and capital gains possible. The use of negative gearing is meant to facilitate such situations where an investor loses income from their investment property and the taxable income, to reduce the tax levied on him/her. Furthermore, capital gain is where negative gearing comes into play investors can unlock the future appreciation in property values that occasionally depreciate.

Is negative gearing always beneficial?

While negative gearing may help to save taxes and offer a chance of future capital gains, it also has some dangers, mostly cash flow problems. The consequence of a negative gearing strategy largely depends on market conditions, legislative regulations, and borrowing costs. As such, you should pay attention to your finances, risk tolerance and investment objectives while planning for negative gearing.

It’s important to approach negative gearing with caution, and it’s recommended to seek advice from tax accountants or mortgage brokers in Perth before pursuing this strategy. Consulting with a tax agent in Perth can help you determine if negative gearing aligns with your investment objectives and financial conditions.

Here are some frequently asked questions related to negative gearing in rental properties in Australia:

Q: What is negative gearing in Australia?

A: I In Australia, negative gearing works as the investor takes out a loan which is used to buy an asset as an investment property. The costs (including mortgage interest and upkeep expenses) of the ownership are more than the rental income, resulting in a net loss. This deduction is thus allowed when computing taxable income which in turn leads to decreased tax amounts.

Q: How does negative gearing work in Australia?

A: In Australia, your rental property can be successful when all the profit, after deducting all the costs, is used as the basis for reducing taxes on the other sources of your taxable income for instance your salary. This implies a lowering of your overall tax burden by this means.

Q: What expenses can be claimed under negative gearing?

A: Expenses that can be claimed include interest on loans used to purchase the property, property management fees, repairs and maintenance, insurance, council rates, and depreciation.

Q: Are there any risks associated with negative gearing?

A: While negative gearing offers a good tax advantage, it also has its drawbacks, including a risk of interest rate changes, i.e. maintenance costs and property value fluctuations. Investors need to take a cautious step in analyzing their financial state and the depth of their risks before deploying this approach.

Q: How does negative gearing affect cash flow?

A: Negative gearing typically results in a cash flow deficit, where rental income does not cover expenses. Investors may need to contribute funds to cover these costs, relying on potential tax benefits to offset the loss.

Q: How to calculate negative gearing?

A: Calculate negative gearing by subtracting rental income from deductible expenses. If the result is negative, the property is negatively geared, offering potential tax benefits but possibly requiring additional cash flow. Regular financial reviews are crucial. 

Q: How does negative gearing work? 

A: Negative gearing allows investors to deduct losses from owning an investment property from their taxable income. This reduces their overall tax liability. However, it can result in a cash flow deficit, requiring investors to cover expenses out of pocket.

Q: Is negative gearing worth it?

A: Negative gearing can offer tax benefits and potential for capital growth, but it requires covering ongoing expenses from your pocket, affecting cash flow. Market conditions, risk tolerance, and long-term strategy should be considered. Consulting professional tax accountants or mortgage broker for personalized advice is wise.

Q: How can I maximize the benefits of negative gearing?

A: To maximize the benefits of negative gearing, investors should carefully manage expenses, seek professional tax advice, consider long-term capital growth potential, and regularly review their investment strategy to adapt to changing market conditions.

Q: What are the tax benefits of negative gearing?

A: The tax advantages of negative gearing in Australia are that the loss from rental expenses is deducted from other income, thereby reducing the total tax obligation. Also, investors could get capital gains tax discounts when selling the property, thus, increasing the tax benefits.

Q: Is negative gearing good?

A: Negative gearing is beneficial for investors due to tax savings and increased investment opportunities. However, it can lead to higher property prices, reduced government revenue, and increased inequality. Therefore, its overall impact is mixed, good for individual investors but potentially problematic for housing affordability and economic equity. 

Q: Does negative gearing reduce taxable income?

A: Definitely, the opportunity from negative gearing is that it reduces taxable income. The investors will be able to consider the net loss as a deductible from their taxable income therefore, the taxes they owe will decrease. This deduction, therefore, decreases the investor’s taxable income, which may make him belong to a lower tax bracket, hence, he/she is going to pay less tax in total.

Q: Where can I seek advice on investment in negative gearing and rental property?

A: Engaging with the tax accountant or mortgage broker in Perth, especially one who knows property investment, can be very helpful as the person will guide the investor and help them make the right decisions regarding negative gearing and rental property investment in Australia.

In conclusion, the negative gearing on rental properties is a very strong tool for property investors in Australia. it can give them tax benefits and the opportunity to earn long-term capital gains. However, one should take into account their financial situation, risk tolerance, and investment aims before implementing the negative gearing strategy. The negative gearing has to be done with care and you need the best tax accountants in Perth or mortgage brokers to get your professional advice. 

If you have any questions about maximizing your financial well-being, please feel free to contact one of our Bookkeeper / Tax Agent / Tax Accountant at 0893860047. Let’s shape your success together!