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
|Interest on loan||22500||Building||5000|
|Rates- land &water||2200||Fixtures||4000|
How is the tax rebate calculated?
|minus Property Expenses||31500|
|Total tax deduction||17100|
|At 37% MRT + 2% Medicare||17100 x .39 =|
|Pay by pay||$128pw|
How are my out of pocket costs calculated?
|COST to own investment property||31500|
|minus tax rebates||6669|
|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%|