Is Negative Gearing a Positive Investment by Tina Zawila

At this time of the year we meet with many clients who own rental properties and who are very keen to have their income tax returns prepared and lodged so that they can access their tax refunds.

There’s also been lots of talk in the media about the suggestion that the government may abolish “negative-gearing” in the future, which would potentially wipe out the rental property investor’s annual tax refund!

Before we talk tax, let’s talk about the fact that purchasing a rental property is a major investment decision. Like all major decisions, careful thought should be given to the worthiness of the investment prior to signing the contract. As a minimum you should consider the following issues:

1)      Rental Returns – what is the current state of the rental market?

2)      Capital Growth – what are the long term prospects for the property?

3)      Funding Capacity – can you manage rental expenses including loan repayments if the property is untenanted for a period?

4)      Liquidity – how long will it take you to sell the property if you need to realise your equity?; and

5)      Comparison - how does the investment compare with alternatives such as shares, managed funds, listed property trusts etc?

You will note that tax isn’t mentioned in the list above, and the reason for that is that “saving tax” should be an added ‘bonus’, not the predominant reason for the investment.

So what is “negative gearing”?  Quite simply it is where the expenses exceed the income received.  This net loss can be offset against other income in your tax return, reducing your tax payable, or creating a tax refund.  The amount of the tax benefit is essentially the net loss multiplied by your marginal tax rate. The higher your marginal tax rate, the higher your tax benefit from negative gearing.

Remember, the difference between the tax benefit gained and the actual loss on the property comes out of your pocket.  In order to break-even each year, the property must be growing in value by at least your out-of-pocket costs.

The professionals at Sothertons Gladstone are here to help you understand taxation minimisation strategies, call us today on 4972 1300.