Negatively gearing property
WITH the correct financial advice combined with the right property, negatively gearing is a great way for you to enter the property investment market and or increase your property portfolio.
When the costs of owning a property exceed the income the property generates, it is said to be negatively geared. Once a loss is realised a tax claim or deduction can take place.
Deductions can be categorised into three main classes:
- Building deductions - Items such as the building can be claimed and depreciated. Deduction rates of either 2.5% p.a. or 4% p.a. are applicable depending upon the construction date.
- Revenue deductions - This includes home loan interest, repairs, ongoing maintenance, management fees, insurance, body corporate fees, bank fees, gardening, cleaning, municipal rates and taxes as well as other rates like gas & water.
- Capital deductions - Capital items such as light fittings, hot water service, air conditioners and furniture are subject to depreciation. Items such as these are depreciated over a number of years rather than all at once. To submit a tax claim an investor needs to organise a property depreciation schedule from a professionally qualified person.
As is the case there are inherent risks associated when borrowing to fund an investment. The upside is your gains can be increased however your losses can be magnified. As a rule investors should be financially capable to absorb the effects of falls in values as well as the possibility of interest rate fluctuation. To minimise the risk the following should be considered:
- Select a property that is easy to attract good tenants and one that has a great location and will increase in value over the long term.
- Include Mortgage Protection Insurance with your investment loan.
- Have sufficient funds to cover.
- Repayments if your tenants are late with their rent.
- If the property is vacant for a period of time.
- Ongoing repairs and maintenance.
Here is a simple example of the way a negative geared investment can work.
Purchase price $ 400,000
Deposit $ 50,000
Total Borrowed $ 350,000
Interest 6% p.a. $ 21,000
Rent p.a. $ 15,000
Outgoings inc. deprec.
rates, insurance, water $ 3,000
Net Income $ 12,000
Net Loss $ 9,000
In this example the investor has reduced their tax liability on their assessable income by the net loss of $9,000.
This type of investment is not for everyone and you should always consult your accountant or financial advisor before launching into a negative gearing strategy.
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