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How Much Can You Claim on Negative Gearing

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Negative gearing has a long history in Australia. It keeps rental prices low and helps landlords make the most of their property investment. As a property investor, it’s well worth considering. While it’s a controversial policy, negative gearing can help soften the blow of a rental property losing money. Or, many property investors implement negative gearing as a strategic way to build wealth in the long term.

All property investors aim to make a profit from their rental income. This is known as positive gearing. However, when the cost of the property outweighs your rental income, your property investment is negatively geared. You’ve made a loss.

Luckily, there are tax benefits for such a scenario. We’ll unpack what exactly negative gearing is, how to calculate it, and whether it is a good investment strategy for you.

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What is Negative Gearing?

Essentially, a negatively geared property investment is a rental property that has made a loss. The cost of loan repayments, strata fees, council rates, and other rental expenses is more than the income. While property investors would have to face a loss in most countries, the Australian Taxation Office allows investors to claim tax deductions.

Like other business costs, the ATO treats investment property expenses as tax-deductible. For example, in the first year of owning your rental property, you might have to cover:

    1. Interest repayments
    2. The home loan
    3. Renovation costs
    4. Various maintenance fees

To ensure your investment property is competitive, raising the rent is not always sensible to cover your costs. Instead, you make a net rental loss. However, you can deduct these investment expenses from your taxable income.

Negative gearing isn’t necessarily a good idea in the long term. Unless you can guarantee that the property value will go up, you’ll make a loss year on year.

While typically thought of concerning investment properties, you can also negatively gear shares and bonds.

What else to claim on tax on your investment property?

So, what can you claim as deductible expenses? The ATO doesn’t allow you to claim deductions on all your costs. Therefore, it’s essential to know what to put as a tax deduction on your tax return for that financial year. If in doubt, seek tax advice.

Home Loan Interest

Interest repayments on home loans are significant expenses. Let’s say you borrow money of around $400,000 over a loan term of 30 years and an interest rate of 2.10%. Your total payable interest expenses would reach $139,482. In the first year, you pay $8,307.22. However, if you negatively gear this, you can deduct $8,307.22 from your taxable income. This would significantly reduce your tax bill.

Moreover, it’s worth considering applying for an interest-only home loan. The property investors would be able to claim all their repayments.

That said, when you shop around for your investment loan, a lower interest rate can still save a lot of money. Don’t rely on negative gearing.

Advertising for Tenants

Vacant properties are a nightmare for investors. Not only do you lose rental income while it is empty, but you have to find new tenants. Unless you privately find tenants, you will probably have to pay for advertising for tenants.

However, advertising expenses, luckily, are tax-deductible. In addition, you can deduct any agency fees and photography costs.

Repairs and Maintenance

As a landlord, you are legally required to maintain a safe investment property for your tenants. Therefore, you will need to organise regular maintenance work, such as plumbing, cleaning, or gardening. You will also need to attend to damage, for example, mould or broken fixtures and furniture.

As long as these expenses maintain or restore the original condition of the building, they are tax-deductible. Let’s say you needed to repair a broken door. You would have to use the same materials for the original repairs and maintenance. However, if you used higher quality materials or installed upgrades, this counts as an improvement.

Improvements aren’t eligible for tax deductions straightaway as they enhance the property value. Although, you can still gain tax benefits and other profitable income.

Depreciation

As we mentioned, you cannot immediately claim a full tax deduction on any upgraded renovations or improvements. However, you will be able to claim its declining value. All assets depreciate over time. To correctly assess its declining value, you’ll need to organise a depreciation schedule. Luckily, this expense is also tax-deductible.

If you include the assets throughout the entire property, the depreciation value will quickly increase. As depreciation is not a cash loss, it enables you to turn a positively geared property into a negatively geared property.

For example, your general expense for the property equals $22,000 a year. You make $25,000 a year in rental income. This means you have a positively geared property of $3,000.

However, if we factor in depreciation, you might be able to claim another $6,000. Yet, as this is not a cash expense, you have not made an immediate or tangible loss. But, you have tipped your property into a negatively geared one. Your tax liability reduces to around $16,500 from $18,500 when positively geared.

Property Management Fees

Many property investors hire a property manager or real estate agent to look after their property and tenants. You can claim property management fees as tax deductions. These are ongoing fees. Therefore, you can claim each year’s expenses on your tax return every time your property is negatively geared.

One-off costs, such as hiring the real estate agent to purchase the rental property, can only be claimed in the first financial year.

Other Deductions on Taxable Income

Other deductions you can make include on your investment property:

    1. Council rates
    2. Strata fees
    3. Body corporate fees
    4. Some legal fees
    5. Insurance (such as income protection, landlord insurance, and building insurance)
    6. Water bills
    7. Gas bills
    8. Electricity bills
    9. Land tax
    10. Garden maintenance (such as lawn mowing)
    11. Your initial deposit
    12. Mortgage set up fees (including Lender’s Mortgage Insurance)
    13. Stamp duty
    14. Mortgage account-keeping fees

What tax deductions can't you claim on rental property?

You can claim not everything against your income tax. If you’re unsure, ask a tax accountant for personal advice. Here is what you won’t be able to claim on your investment property.

Your Principal Loan Repayments

While you can deduct interest expenses from your home loan, you won’t be able to claim the principal. The principal is the loan amount you initially receive from the credit provider to cover the house’s purchase price. Therefore, with a standard principal and interest home loan, you’ll have to separate the interest repayments and deduct only them.

Capital Gains Tax and Capital Losses

When the time comes to sell your investment property, you’ll make a profit or a loss. This has to be recorded on your tax return along with your other income. So, you make a capital gain on the house sale. You’ll have to pay capital gains tax (CGT), similar to your marginal tax rate.

In Australia, you don’t have to pay capital gains tax when you sell your primary place of residence. Yet, with an investment property, you’ll have to pay CGT, and you cannot claim it as a deduction.

If you make a loss, you won’t be charged CGT. However, you also won’t be able to claim the capital loss from your taxable income.

Second-Hand Depreciating Assets

Depreciation can make a significant difference to landlords negatively gearing. However, there are limits. You cannot claim the declining value of assets in your rental property that is second hand. This includes anything from white goods left in the property when you purchased it to used assets purchased online.

Generally speaking, the asset has to be brand new when you purchase it to claim depreciation. However, there is an exception. If you bought your investment property before 19:30 on the 9th of May 2017 and installed a second-hand asset before the 1st of July of the same year, you can claim depreciation. You also can claim depreciation for the following, even if done by the previous property owner:

    1. Structural work
    2. Building structure
    3. Substantial renovations

Most Expenses When Your Property Is Vacant

If the property is vacant or used for personal use, you won’t be able to claim any tax refund. Only while your property is currently rented out or genuinely available for rent can you make any claims.

Therefore, if your investment property is a holiday home, you can only make tax deductions for periods when the property is used. If you, any family or friends visit at a discounted or free rate, then you cannot claim. The ATO can be pretty rigorous checking holiday home tax claims.

If your rental property is a holiday home, consider advertising it on a popular lettings site to provide strong evidence to the ATO that it is available to rent when you say it is. The same is true of long term rental properties. If it’s vacant but you fussily reject tenant applications, then you won’t be able to claim tax deductions.

Other Fees

Other costs that you cannot claim:

    1. Expenses you haven’t paid (e.g., if your tenants pay the water, gas, and electricity bills, you can’t claim these)
    2. Doubled up fees (if you claim strata fees which include garden maintenance, then you cannot claim gardening costs separately)
    3. Some legal fees
    4. Acquisition and disposal costs
    5. Inspection costs before purchasing (e.g. building inspection)
    6. Expenses relating to your personal use of the property

Calculating Negative Gearing

You can find a negative gearing calculator online. Or, follow these simple steps to work it out yourself:

    1. Add up your net income from the property. This will be the rental income collected. If it’s a long-term rental property, divide the weekly rent by 52. For holiday homes, add up the weeks the property was in use.
    2. Calculate your property expenses. These costs include everything we mentioned are eligible to deduct, including interest on your home loan, maintenance costs, land tax, and management fees. You’ll need to detail these on your tax return.
    3. Deduct the depreciation. Remember, depreciation is the decreasing value of the building and non-second-hand assets (unless you owned the property before 2017). For example, you could claim carpets, curtains, floors, and appliances depreciation.

Seek professional advice from an accountant if you’re unsure how much you can claim on negative gearing.

An example of Negative Gearing

Let’s look at an example in stages to see how to calculate negative gearing clearly.

    1. You buy a house for $400,000 with a deposit of $100,000. You get an investment loan of $300,000 from a credit provider. It’s an interest-only loan with a rate of 4.2%, equaling $12,600 interest payments for the first year.
    2. You receive $300 a week in rent. This equals $15,600 for the whole year.
    3. You spend $1,000 on maintenance, $2,100 in strata fees, and another $3,000 on insurance and property management fees in the first year. Depreciation value reaches $6,000. These costs plus the interest add up to $24,700, which results in a loss of $9,100.
    4. You can reduce your taxable income by $9,100.

Is Negative Gearing worthwhile?

Negative gearing is an investment risk. Essentially, you commit to making a loss. So, how can it be worthwhile?

Firstly, if your taxable income is $95,000 a year, you’ll pay 37% in tax. Yet, you can drop to a lower tax bracket by deducting $10,000 on a negatively geared property. Earning only $85,000 in taxable income, you’ll be taxed 32.5% instead.

Secondly, many negatively geared properties tend to be in high demand areas. Therefore, property prices go up, and you can achieve more significant capital gains in the long term. This is especially true of property investors who build a portfolio – although it’s best to have a mix of negative and positively geared properties.

What Are the Risks of Negative Gearing?

As with any investment strategy, negative gearing comes with its risks. Borrowing money from a bank to finance a property purchase carries some risk in itself. Negatively gearing a property to make a loss adds to this. Take some time to consider the following questions fully:

    1. What if you have a cash flow shortage?
    2. What if the property is left vacant and you cannot find a property?
    3. What if the property market suffers and your house doesn’t increase in value?
    4. What if you cannot make your loan repayments?
    5. What if the negative gearing tax laws change and no longer work in your favour?

The best way to mitigate these risks is to thoroughly research your investment property and find a mortgage broker to get you a suitable home loan for your financial situation. Cash flow is essential. Ensure that you can cover your mortgage repayments and meet other expenses, even if things take a hit.

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Key Takeaways

Negative gearing is a practical and strategic possibility when owning an investment property. There’s no guarantee that every investment venture will go well. Negative gearing at least provides a nice cushion should your rental property make a capital loss. However, if you adopt negative gearing as a long-term strategy, watch out for the risks.

Make sure you know what you can deduct and what you cannot. Most importantly, speak to mortgage brokers, a tax specialist, and a financial advisor to make the most of your negatively geared property.

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