Negative Gearing
Negative gearing. What is it, how does it work and what are the deductible items.
Despite the ongoing media attention and political debate Australia's negative gearing policy remains firmly in place and presents property investors with significant tax saving opportunities.
As always, this shouldn’t be considered tax advice, always seek a professional opinion on your personal situation.
According to the Governments treasury.gov.au site negative gearing is ‘a commonly used term used to describe a situation where expenses associated with an asset (including interest expenses) are greater than the income earned from the asset.’
The underlying principle of tax breaks for investors is that any net losses from your investment can be deducted from your taxable income. We’ll cover potential deductions shortly, however let’s first run through this scenario.
You earn a salary of $100,000
Rent from your investment property is $20,000
Interest and costs on your investment property are $30,000, resulting in net loss of $10,000
Your taxable income is then $90,000 and you would receive a refund on the $10,000 difference as you’ve paid tax on $100,000 via your salary
So what makes up the costs of an investment property that drive these tax savings…
Interest
Generally, interest cost will be the largest annual expense and your EOFY bank statement will summarise annual interest expense. Interest on investments being tax deductible is often why investors are happy to pay interest only on investment debt. The other key thing here is that if you have both investment and principal place of residence (PPOR) debt, you should be trying to reduce your PPOR debt whilst leaving investment debt higer given PPOR interest isn’t tax deductible.
Depreciation
The building itself of your investment property will reduce in value over time as they age, and this reduction can be claimed as ‘loss’ at tax time. Your accountant or tax advisor will be able to provide a depreciation schedule for your property, or you can get a guide using an online calculator.
How much depreciation you can claim depends on a number of factors, with the age being a large contributor. Generally, a property will depreciate a lot during its early years with depreciation tailing off as it ages.
Repairs & maintenance
Any money spent on property maintenance or repairs is deductible. Things like when a plumber comes to fix drainage right through to renovations are included.
Strata costs and land taxes
Strata fees, council rates and land taxes are deductible and where applicable can add up to a lot over the course of a year.
Rental expenses
Costs relating to leasing your property, much as agents fees and costs of changing tenants are deductible.
Holding costs
If for example you buy vacant land to build an investment on, there will be costs such as interest that are incurred before you begin to make income on completion and leasing of the property.
Accounting costs
The costs of having your investment property tax affairs arranged also form part of your deductions.
If you’re considering an investment property, please feel free to get in touch.
