There are many technical intricacies of investing in property, with negative gearing being a highly discussed topic in the industry. As investors choose to hold onto their negatively geared property due to their own long-term investment strategies, it’s important to understand the benefits.
Key benefits of negative gearing property
When a property is negatively geared, it’s making a loss. Due to the current COVID-19 pandemic, many Australian property investors are facing negative returns from their investment properties due to loss of rental income. While everyone’s financial circumstances are different, the benefits of negative gearing help investors to reduce their taxable income.
It’s important to note that deciding whether to keep a negatively geared property is a significant financial decision. Everyone’s decision-making process and investment strategy is different, but the two key benefits are the same for all.
1. Reduction in taxable income
The loss made from a negatively geared property reduces an investor’s taxable income for each financial year.
This tax offset can provide benefits for many types of investors, especially those with high marginal tax rates, or rentvestors that are wanting to capitalise on their investment while they build their portfolio.
Let’s look at a practical example to understand how this works.
Joe works as an engineer for a construction company. He purchased his first investment property in 2019. The property is leased to tenants who paid $25,000 in rent for the 2019-20 financial year.
While the property produces rental income, it also has many associated expenses. For the 2019-20 financial year, there was a total of $35,000 in expenses, including depreciation, interest repayments, insurances, property management fees and maintenance costs.
This resulted in a total loss of $10,000 for the 2019-20 financial year. Joe can use this loss to reduce his taxable income.
With his tax rate of 32.5 per cent, this loss brings his tax bill down by $3,250. This effectively reduces his investment property’s loss to $6,750.
Given his goal of long-term capital growth, Joe is comfortable making a $6,750 loss.
2. Long-term gain
Property is a tangible and resilient asset. While the market is not constant and regularly fluctuates, property values generally increase over time and so do rental rates.
An investor who is keeping their negatively geared property may be looking to capitalise by selling when it’s value increases or take advantage of higher rental returns in the future. This long-term capital gain often offsets the short-term loss.
Lucrative depreciation deductions are available for all properties
Property depreciation is the natural wear and tear of the building and its assets over time. Investors of income-producing properties can claim this depreciation as a tax deduction. Depreciation is a non-cash deduction, meaning that an investor doesn’t need to spend money in order to claim it.
All investment properties hold depreciation deductions that can unlock hidden cash flow. The gearing of a property doesn’t impact whether an investor can claim depreciation. In some instances, depreciation can change a previously positively geared property to be negatively geared without experiencing a further loss.
BMT Tax Depreciation has been the most trusted depreciation specialist in the industry for over 20 years. With offices Australia wide, they can provide comprehensive depreciation schedules to all investors and in turn, help them maximise their cash flow.
To learn more about depreciation, or what is involved in a tax depreciation schedule, Request a Quote or contact the expert team at BMT on 1300 728 726.