I was asked the other day about NEGATIVE GEARING in regard to property. They were new to property investment and weren’t too sure about all the terminology and what it all meant.
Negative Gearing of investment properties was introduced in Australia as an initiative to encourage income earners to purchase investment properties to enhance the availability of rental property for people who are not in a position to purchase their own home.
The term negative gearing …. Is the capacity to CLAIM losses as Tax Deductions when there is an expectation that in the future PROFITS Will be made!
The shortfall between the rental income and the loan repayment, rates/insurance/maintenance and letting fees are 100 per cent tax deductible in that year.
Deductions in Purchasing Costs include: Valuation Fees, Stamp Duty on mortgage, Bank application Fees and Consultancy Fees.
Depreciation costs including Building Costs (2.5% over 40 years), Fixtures and fittings (20%pa), Inspection Costs (100% write-off annually) and other acceptable costs (as per the tax schedule).
New investors don’t always understand why the government offers these incentives.
However, the obvious advantage to the governments is they do not have to supply housing to meet the total population growth so they are saving millions of dollars in funding plus mammoth administration and infrastructure costs.
To encourage the private sector to invest in property for rental, government have made available extremely viable tax incentives for the investor. It is through these available tax incentives that investors are able to purchase property at very little cost to themselves taking into account what the tenant pays plus the tax incentives. It means even average earners can become wealthy through property investment. According to a pie-chart I saw recently the tenant pays approx 45%, tax office about 41% leaving you with about 14% to contribute to paying off the home. That just gives you a bit of an idea.
