How Negative Gearing Works
Gearing relates to borrowing to buy a property with only a small personal contribution and borrowing the larger % from others.
Property investors rent the property to make an income in the short term and a capital gain, long term.
A property investment is considered negatively geared when the rental income does not cover all the costs associated with owning the property
The Australian Tax Office allows property investors to reduce their taxable income by the amount of the shortfall.
What are the costs of ownership?
| Annual Property Expenses (cash) |
Amount | Depreciation (non cash) |
Amount |
|---|---|---|---|
| Interest on loan | 22500 | Building | 5000 |
| Rates- land &water | 2200 | Fixtures | 4000 |
| Landlord Insurance | 350 | ||
| Contents Insurance | 550 | ||
| Property Management | 2050 | ||
| Pest Inspection | 350 | ||
| Maintenance | 500 | ||
| Body Corporate | 2500 | ||
| Miscellaneous | 500 | ||
| Total | 31500 | Total | 9000 |
How is the tax rebate calculated?
| Rental Income | 23400 |
|---|---|
| minus Property Expenses | 31500 |
| minus Depreciation | 9000 |
| Total tax deduction | 17100 |
| At 37% MRT + 2% Medicare | 17100 x .39 = |
| Tax Rebate | $6669 |
| Pay by pay | $128pw |
How are my out of pocket costs calculated?
| COST to own investment property | 31500 |
| minus rent | 23400 |
| minus tax rebates | 6669 |
| Owner’s contribution | 1431 |
| Weekly out of pocket cost | $27.50pw |
Who pays what %?
| Tenant Pays | 23400 (Rent)/31500 (Total costs) | 74% |
| ATO Pays | 6669 (Rebates)/31500 (Total costs) | 21% |
| Owner Pays | 1431 (out of pocket)/31500 (Total costs) | 5% |