Property investment: Negative gearing

So what is negative gearing, and how can it benefit you? Speak with an expert

Even if you’ve never been a property investor you have probably heard the term negative gearing.

Gearing is where you borrow to invest in an income producing asset, in this case, property. Most property investors will borrow to buy a property. Negative gearingis where the cost of borrowing exceeds the income from the property.

When your rental expenses exceed your rental income this creates a net rental loss. This loss reduces your taxable income, and a lower taxable income means a lower tax liability.

The tax benefit that the loss creates is only a percentage of the net rental loss. The percentage depends on the marginal tax rate of the investor (see table below).

A taxpayer earning $30,000 has a marginal tax rate of 16.5%, so a net rental loss of $1,000 provides a tax benefit of $165. For a taxpayer with income over $180,000 the benefit would be $465. So negative gearing is more advantageous for higher income earners.

It is important to remember that even though a tax loss increases your refund a loss is still a loss – your investment is costing you money. This means a negatively geared rental property is only a profitable investment if the capital growth is more than the sum of the losses incurred over the period of ownership.

It is critical to be able to evaluate whether your property is profitable.  See our separate post on this topic.

Marginal tax rates 2010-11

Taxable income Marginal tax rate
0 – $6,000 Nil
$6,001 – $37,000 16.5%
$37,001 – $80,000 31.5%
$80,001 – $180,000 38.5%
$180,001 and over 46.5%

Source: ato.gov.au

 

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