Negative gearing is an investment practice in Australia that involves investing borrowed money on an asset that doesn’t earn as much as the loan’s interest. This results to a loss that can then be used to earn tax deductions. In the property market, this translates to taking out a loan to purchase a property with rental income shortfall.
According to recent surveys, Australia has over two million landlords thanks to the boom in developments, particularly in New South Wales and Victoria. Typically, in the short term the gross income of these investments will not cover the cost of owning the property.
Although from the surface this might seem like the wrong approach it is actually possible to reap more benefits this way. Given the current economic climate in Australia, markets and values will continue to thrive due to low interest rates. Once those properties increase in value over the years, more profit can be earned. This is where it should be emphasised that property investment is a long term investment that will result in wealth for you and your family into the future.
Anyone can reap the benefits of negative gearing and are turning to this form of financial leverage when building their investment portfolio. Even more promising is the governments decision to leave the majority of the negative gearing benefits the same in the 2017-2018 federal budget. This means that investors can still claim most expenses of owning an investment property.
Can Owners Get Tax Benefits?
Bear in mind that negative gearing is possible when the expenses of taking out and maintaining a property investment exceed the net rental income that can be received from it. Those who negatively gear expect the value of their residential investment to grow in the future. They know that by taking a loss now they can sell their property for a greater price than what they bought it for. Especially with the median cost of property increasing, this is a great idea to secure your future.
Expenses that can normally be claimed on tax include accounting, repairs, insurance premiums, interest payments, and advertising. Most of these are normally deductible immediately in the year they are paid but these cannot be enjoyed when an investment property is left empty by choice.
What If There Are No Tenants?
For the Australian Tax Office to consider a claim for rental losses, a landlord needs to demonstrate that they are putting out an effort to make a profit with their rental. The owner need not endure an audit to look at whether they have a genuine property investment purchase just by keeping their building on the market.
Does This Negative Gearing Apply To Holiday Homes?
For a vacation house that is purely there for an owner to enjoy, it is possible to claim it as a tax deduction. However, if the residential investment is listed with an agent and available for short-term leases, it is possible to apportion the costs for those time spans. For instance, if a beachside house is occupied by the owners for only one month and rented out for the rest of the year, the landlord can claim tax deductions for 11 months.
What Now?
Anyone who is thinking about investing in property should look into negative gearing. It is a sound strategy for those who want to build assets for retirement. It is especially advisable for those who know how to carefully select properties. Then again, that need not be a problem when you’re looking at the home packages and other services on iBuildNew where you are guaranteed to find quality options on the market. If you would like more information about making the most out of your investment decisions make sure you download the iBuildNew Property Investment Guide, full of fantastic ways to make property investment work for you. Click here to download the guide.
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Zoe Langenberg
Zoe is passionate about coffee and interior design. You can find her most weekends exploring an art gallery or devouring a good book.
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