Negative Gearing

Gearing basically means borrowing to invest. Positive gearing is where the income from the asset purchased with the loan is greater than the loan and other costs of the asset, so you actually earn money from it every year over and above the costs. Negative gearing is the opposite, where the costs of investing are higher than the return you achieve. With an investment property, that is when the annual net rental income is less than the loan interest plus the deductible expenses associated with maintaining the property (such as property management fees and repairs).

When you are negatively geared you can deduct the costs of owning your investment property from your overall income reducing your tax bill. High-income earners benefit the most, because they are in the top tax bracket.
In addition, while you record a loss on the income from the property, in theory capital gains in the value of your property should make the investment worthwhile.

But don’t over-commit to property just to get a tax deduction. Those tax benefits generally don't come until the end of the financial year and you have to make your mortgage payments in the meantime.
That said, you can apply to have less tax deducted from your pay to take into account the impact on your overall income of expected losses on an investment property.

Say you earn $80,000 a year, gross, in your day job but you can reliably estimate that you'll make a $16,000 loss on an investment property. You can apply to have your tax payments calculated on an income of $64,000 rather than $80,000 giving you more cash in hand now, rather than a refund at the end of the year. Get your sums wrong, though, and you’ll owe the tax man money at the end of the year.

See www.ato.gov.au for information about pay-as-you-go (PAYG) withholding payments.

Remember, too, that a capital gain which will be taxed is never assured. Whats more, the benefits of negative gearing are smaller when interest rates and inflation are low and can be offset by charges such as the land tax levied in NSW (see www.osr.nsw.gov.au).

Talk to Mortgage Australia today about your next home loan.