This page outlines a brief guide to negative gearing and depreciation. Accountants and solicitors are the only professionals qualified to give you advice in this area. It is important for you to appreciate the principles of negative gearing in order to assist you in with your decision to purchase an investment property.
The major principles of negative gearing are listed below :
The first basic premise is to purchase a home with the view that it will increase in value over a long period of time thus giving a capital gain to the investor.
Property investments are long term propositions as the value can rise & fall.
Most investors purchase investment properties with the view that their profit lies in the capital growth.
The rental returns usually only assist to cover loan interest and running costs
Investment loans are usually geared so the investor gains a maximum taxation benefit.
Three parties assist in paying off an investment loan :
Investors use domestic property as a wealth creation vehicle and as an alternative / addition to their superannuation.
Investment properties are an ideal way of providing income streams during retirement as the rental income rises with the C.P.I.
Most investors seek to build up a portfolio of investment properties, funding them with interest only loans.
At retirement the investor usually sells one or two properties to clear all loans on the remaining properties.
When the return or income you receive from your rental property is less than the expenses of owning that property (interest on your loan, council rates etc) – the property is said to be negatively geared.
In some instances the Australian Taxation Office will allow this ‘loss’ incurred on the investment to be offset against other income, as a tax deduction.
Example:
Rent received |
9,000
|
|
Expenses incurred
|
12,000
|
|
Loss which may be claimed as a tax deduction
|
3,000
|
*Consult with your tax adviser to see how negative gearing can be applied to your personal situation.
Seek independent financial advice
The old adage that if an investment opportunity sounds too good to be true, it usually is – holds true. Always be sure to research your investment decision thoroughly. Be sure to seek independent property and financial advice.
If you are turning to property investment for capital growth, tax benefits and as a retirement strategy, it is very important to learn as much as you can, especially if it is an area you’re not completely familiar with.
