It was only a month ago that negative gearing was all over the headlines. As the hour of the 2015 Budget approached, there was much debate about the tax break, leading some to fear it might end up being scrapped. But with the prime minister ruling out any changes to negative gearing, it was suddenly given a new lease of life.
Safe in the knowledge that negative gearing will be around for some time yet, now might be the perfect time for you to take advantage of it as part of your property investment plan.
Supporting your cash flow
The ability to reduce your tax bill in the event of a rental loss can be vital to building your wealth - particularly if it's your first time around the block. Running a rental can put pressure on your cash flow, and the tax savings that result from negative gearing can help offset this.
Property investors come from all kinds of financial backgrounds - both wealthy and more modest. As the Property Council of Australia has pointed out, those who claimed negative gearing concessions in 2013 included 62,000 teachers and 83,000 clerical workers, all of whom earned less than $80,000 a year.
For investors from this kind of background, the resultant tax savings can be essential to their success. In fact, if the amount deducted - including depreciation - outweighs the expenses, it's possible to end up with a negatively geared but cash flow positive property.
Don't forget, too, that while your tenants and the tax man are essentially paying for your property, it will also slowly be growing in value. Upon selling the property, it may well be the key to funding your retirement or any other large expense.
High earners can also benefit from negative gearing. If you pay the top marginal tax rate, dropping down even one bracket can potentially save you thousands. For instance, those in the top rate pay 45 cents for every dollar over $180,000, while individuals in the next bracket down pay 37 cents for every dollar between $80,001 and $180,000.
What's factored into negative gearing?
Negative gearing is most simply defined as when the cost of running a property is more than the rental income it produces. This cost is made up of a number of different expenses that you'll have to calculate:
Interest on the loan
Council rates and water charges
Property management fees
Repairs, cleaning, maintenance and pest control
This is only a short list of the expenses that come into it, so be sure to talk to an expert if you need further information. With the financial year coming to an end soon, it's worth doing so as soon as possible.
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