Hello,
I have a very naive question, so please be patient with me, but your help is appreciated.
1) Could someone explain how negative gearing works. I understand the simple concept, but in practice? For example I have seen a property I would like as an investment, I think it has good capital growth prospect, my thinking is a longer term investment, but:
a) Mortgage per month 2000
Strata fees and council, water 6000
So total outgoings: 2600b) I rent out, so incoming is 1300
c) Therofore monthly I am -1300.So I have to find 1300 out of my pocket per month. Or do I? I simply understand I can get some tax breaks on this, for example depreciation + others. Approx. in the case above how much tax break can I get? Is it true I inform tax office of this type of investment and my tax is adjusted accordingly and monthly I get more money in my pay packet to put towards the 1300 I have to find?
2) I have some small bonus per year 8000 dollars before tax, so my simple idea is to use this + some tax breaks to fund a property negatively geared. Does this eem reasonable as a concept. Withouth tax breaks this bonus will nto cover
3) I am a first time buyer as well.
Your help is really appreciated, again sorry for such a simple question.
Hi, in your situation, the worst case scenario would be that there’s no rental income i.e. you can’t get a tenant. That means you must have $2600 every month to pay the outgoings.
You will get back the -ve gearing on your ‘loss’ but this comes off your tax. Therefore you must be earning income that is taxable. So if you earn $100K a year and pay $25K tax, that 25 K reduces by your tax bracket (assume 30% x the interest + costs incurred $2600 per month)
At tax reporting time, you put in depreciation on the property say $20K in year 1 ( you get back 30% x $20000) to reduce the tax bill further.
In this example, if there’s totally no income, -ve gearing reduces your tax by about 9K and depreciation reduces it by 6K. You will still be out of pocket by about 16K.
Please note that this is only an example. It is very rare that a property cannot rent at all but it’s possible. There are also other costs (advertising, insurance, rates etc)
Capital growth is also only guesswork. Don’t be fooled by the mantra that property always goes up. It can go down & remain flat for years on end.
Hope this helps you understand -ve gearing.
Good luck,
Kum YinThanks. I think I understand. I have acouple of questions:
1) Is the tax break only against interest on my loan. If I have interest + capital loan in the case above, i.e. the 2000 mortgage payment i need to make monthly i cannot claim 30 % of the total 2600 as some is capital repayment part of the loan.
2) Can someone check my numbers for the cast the property is rented every month (maybe not truly realistic, but i am thinking of flat close to sydney cbd).
-My loss per year is 1300 x 12=15600
-30% tax break on 15600=4680+depreciation 6=10680
-therefore i have to find 1560-10680=approx 5k per year of my own money.3) I have one question on your example, if i earn 100k, my tax is 25k in your example, but my tax rate is 30% i.e. 30 % is what i get back from my tax
thanks.
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