Negative Gearing Demystified

Negative gearing has been getting a lot of air time in the media lately.  Some members of parliament have been calling for it to be axed and others insist that it is a vital part of the investment landscape in Australia.  As a result of all this media attention, I’ve been getting a lot of questions about negative gearing from young people who are yet to invest in property or shares.

So what exactly is negative gearing?  Allow me to demystify it for you…

Negative gearing refers to an investment advisor (property, shares or bonds) that costs more to hold than the revenue it generates.

Here’s an example:

Donna’s annual salary is $100,000 which means tax payable of $26,947 (based on 2015 tax rates)

Donna buys a rental property for $500,000, using $100,000 of her own money and a loan of $400,000.

Income from investment property:

Estimated Rent: $20,000

Expenses associated with investment property:

Agent Fees: $1,540

Council Rates: $1,600

Depreciation: $6,000 (Estimates Vary)

Insurance: $800

Interest on loan $20,000: (based on 5% Rate)

Land Tax: $575 (in Vic)

Repairs: $500

Total Expenses associated with rental property: $31,015

Net rental loss: $11,015

Original taxable income: $100,000

Less Rental Loss: $11,015

New taxable income: $88,985

New Tax Payable: $22,651

Tax Saving: $4,296

Out of pocket: $11,015 – $4,296 = $6,719

As you can see from the example above, a negatively geared property essentially reduces your taxable income, which in turn, reduces the amount of tax you pay.  It is worth remembering though, that a loss is still a loss and that you always need to enter into an investment with long-term profit gains in mind.