You may have heard the term ‘negative gearing’ in investment circles before, but not known what it meant. If you’re looking to purchase investment property, it’s certainly worth learning about, as it comes with several key benefits for investors that can help you save money.
Securing the right investment loan is a crucial part of the negative gearing process, which is why you can find and compare a range of home loan offers with Savvy. Find out more about negative gearing, how it works and how it can benefit you before you choose your mortgage deal.
The word ‘gearing’ means to borrow money to invest, whether that be in property, shares or other forms of investment. ‘Negatively geared’ in property terms means that your investment property’s rental income earns you less than the cost of your mortgage repayments. This creates a loss which can be claimed as a tax deduction against your other income, resulting in overall tax savings.
If you know your investment property is going to make a loss, you can apply to the Australian Tax Office (ATO) for a PAYG (Pay As You Go) Withholding Variation. This gives your employer permission to take out less tax, resulting in more money in your pay packet on a fortnightly or monthly basis.
An example of negative gearing:
If you normally earn $123,000 a year, for instance, you would be liable to pay $30,577 in tax in Australia. However, if your negatively geared property costs you $5,000 per year to own, this would reduce your overall income to $118,000 a year, meaning that you’d pay $28,817 in tax, saving you $1,760 a year.
As well as reducing the amount of tax you pay, you will also own an asset which will increase in value over the years, so not only are you saving tax, but you’re increasing your overall net assets.
In contrast, a positively geared property is the reverse – the cost of borrowing your funds is less than the rent you receive, so your investment puts money back into your pocket.
Savvy can help you make the best choice when choosing an investment loan by comparing and showing you the best products offered by our lenders. You should always seek specialist advice from your tax agent or financial advisor when calculating the cost of owning a negatively geared property.
There are standard deductions you’re able to claim as expenses on an investment property when you are negatively geared. However, the ATO can change the eligibility of certain deductions from year to year, so it’s best to get expert advice on this matter. You can claim the following as tax deductions on your rental property:
Choose a low maintenance rental property that will remain attractive to potential tenants in an area close to schools, public transport and shops. This way you’ll always have tenants willing to rent.
Receive advice regarding which properties have high capital growth potential. Try to think what the area will look like in five, ten or 15 years and buy a property where people will want to live in the future. An expansion of a railway line or the creation of a new national park can create opportunities to buy where people want to move to.
Allow yourself some free cash flow in case interest rates rise over the life of your loan or you’re suddenly hit with an unexpected bill. It may not be worth the trouble to own an investment property if it means you’re not fully comfortable with your personal finances.
Start paying off the principal and interest on your investment property loan as soon as you’re able, as you’ll slash the amount of interest that you’ll be liable to pay overall. Interest-only home loans ensure that up to 100% of your repayments are tax-deductible, but your actual loan amount remains untouched during that period. Without any increase in property value, you won’t be able to build equity, which can work against you if you end up looking to sell.