What is Negative Gearing?
Negative gearing has been a hot topic over the past few months leading up to the budget and now the election. With Labor proposing to restrict negative gearing and the Liberals leaving it be, for those interested in investment properties it's important to know the ins and outs.
Are there advantages to losing money?
Australia's tax laws enable taxpayers to offset losses, which they incur in one field of economic activity against future profits. If you have a rental property that you own and the amount of income which you earn from the rent is less then the amount of the costs you incur, you can offset the loss against other income/profits for the year.
Most commonly, the total amount you earn in rent is going to be less than the amounts you spend on your rental property. This means that you've actually made a loss on your rental property and Australia's current tax law allows you to offset this loss against other income.
How do people make money?
People tend to make money off negative gearing through a series of small, annual losses on their rental income. However, at the end of the day, you can make a potentially large capital profit when you sell because you are effectively taxed at half rates due to the Capital Gains Tax discount.
3 tips for negative gearing
With all of this in mind, there are three key things to consider:
- for negative gearing to work you must be operating in a time of rising house prices
- negative gearing is best at the top income tax rates, because these brackets give the biggest tax breaks. As you go lower in tax brackets, the benefits shrink
- finally, this strategy for negative gearing relies on the tax law staying as it is.
H&R Block can help
To get the best advice possible on negative gearing find your nearest H&R Block office and book an appointment.
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