Negative gearing is the process by which investors can offset losses incurred during the course of owning an income bearing investment, against income from other sources, and thus reduce their tax liability.
Put simply, this means that if it costs you more to have an investment than you make on that investment, you can deduct this amount from your taxable income from other sources. Using negative gearing, the shortfall between the income from the investment property and the expenses (ie interest, rates and other expenses) is deducted from other income. So net taxable income (and thus the tax levied) is reduced. The benefit of negative gearing is greater for those people in high tax brackets.
Some initial expenses that may be deducted from rental income include valuation fees, loan establishment fees and lenders mortgage insurance (LMI).
Additionally, here are some ongoing expenses that may be deducted:
- Insurance on the property
- Real estate agents management fees
- Lease preparation
- Body corporate levies
- Council and water rates
- Gardening and maintenance
- Advertising costs
Many of the day-to-day costs of owning an investment property can be treated as deductions against income for negative gearing purposes. Remember, however, that you will need to have to pay for all these things upfront which can be a drain on your finances.
We hope that has helped clarify Negative Gearing and the benefits for investors if you have the capacity to do so.
If you are looking to start a property portfolio or purchase your next investment property, please contact our team on 02 9960 or enquiries@pkproperty.com.au.