21st Decmber 2018
NEGATIVE Gearing, what is it?
Negative gearing is where you borrow money to invest and the income from the investment is less than the expenses. This is common for property investments, for example, where rental income is less than interest and other expenses. Essentially this means you are making a loss.
Why would investor want to invest in properties that make a lost?
It does not make sense.
The loss generated from the property is ‘reduce tax’ payable to the tax department that is allowed. Which means, we get to channel the money which would otherwise go to the tax department to your own property.
Example of negative gearing:
You have a salary of $100,000.00 a year.
According to ABS, the average weekly earnings of average full time Australian is $1,586.20 which means, at $100,000.00 a year income, you are earning more than the average income earners.
When you key in $100,000.00 into the tax calculator from the Australian Tax office, link here: https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=STC&anchor=STC#STC/questions
You will get to pay tax of around $24,632.00 (25% of your wages goes to tax, before medicare levy).
How can you reduce the tax paid to the tax department?
But a property and rent it out to collect rent.
You will have rental income, but you are also entitled to expenses related to the income generated property, which means all the expenses plus the interest paid on the property.
If the rental income, you collected per year is 50,000.00 per year.
If your interest paid is 60,000.00 per year. You paid the expenses to repairs and update of the property comes to 20,000.00, giving you a total of 80,000.00.
Your income becomes 100,000 + 50,000
Less: 80,000 (interest + expenses related to property)
$70,000.00income payable amount
Here is the income reduction, from 100,000.00 to 70,000.00
The tax payable at 70,000.00 is reduced from 24,632.00 to $14,297.00.
This savings of $10,335.00 of TAX payableis WHY we apply Negative Gearing, to channel the money to our own property instead of paying to the tax department, for our future retirement.
If you want to PUT MONEY towards your future retirement, instead of giving the money to the tax department, negative gearing is a great tool that will help build your future. Consult your tax consultant for more details.
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Have a great day, everyday!
Licence Real Estate Agent | Stock and Station Agent| Auctioneer | Strata Manager
Oracodes Realty Pty Ltd
Licence Real Estate Agent in NSW.