There's lots of hype when it comes to negative gearing. And this all stems from the fact that quite a number of property sharks make a killing from selling negatively geared properties to unsuspecting investors.
Sadly, a lot of investors are sold on the potential outcome of owning property (hopefully making truckloads of money) without understanding the immediate consequences of their investment. Negative gearing is a strategy that provides immediate tax benefits while also offering the promise of long-term gains in the form of capital appreciation.
Negative gearing is a form of leveraged speculation in which a speculator borrows money to buy an asset, but the income generated by that asset does not cover the interest on the loan (Interest > Income). In Australia the strategy is motivated by taxation systems which allow deduction of ongoing speculative losses against highly taxed income, but tax capital gains at a much lower rate. When income generated does cover the interest it is simply geared investment which creates a source of passive income.
A negative gearing strategy can only make a profit if the asset raises so much in price that the capital gain is more than the sum of the ongoing losses over the life of the speculation. The speculator must also be able to fund the planned shortfall until the asset is sold. The different tax treatment of planned ongoing losses and possible future capital gains affects the investor's final return.
Things to look for before you invest:
What can be claimed to accelerate the negative gearing:
Make sure you understand borrowing expense before you buy - no everything is immediate deduction following is the list of borrowing expense that is amortized.
On 3 July 2009, Peter took out a 25-year loan of $300,000 to purchase a rental property. Peter's deductible expenses were:
Peter also paid $1,200 stamp duty on the transfer of the property title for which he cannot claim a tax deduction. However, this expense will form part of the 'cost base'.
As Peter's borrowing expenses are more than $100, he must claim them over five years from the date he took out his loan for the property. He would work out the borrowing expense deduction for the first year as follows:
|2009-10 (363 days)|
|Borrowing expenses||x||Number of relevant days in year/ number of days in 5 years||=||deduction for year|
|The borrowing expense deductions for each other year would be worked out as follows:|
|Borrowing expenses remaining||x||Number of relevant days in year/remaining number of days in 5 years||=||deduction for year|
|2010-11 (year 2)|
|$1,282 (that is, $1,600 - $318)||x||365/1,463||=||$320|
|2011-12 year 3 (leap year)|
|$962 (that is, $1,282 - $320)||x||366/1,098||=||$321|
|2012-13 (year 4)|
|$641 (that is, $962 - $321)||x||365/732||=||$320|
|2013-14 (year 5)|
|$321 (that is, $641 - $320)||x||365/367||=||$319|
|2014-15 (year 6)|
|$2 (that is, $321 - $319)||x||2/2||=||$2|
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