A rental property is negatively geared when it is purchased with the assistance of borrowed funds and its expenses exceed the rental income and a loss is incurred.
“Negative Gearing” as a term is commonly used when talking about interest costs and depreciation but it includes all the rental deductions.
Losses incurred can then be offset against other assessable income (e.g. salary, wages or business income) – this enables either a reduction in tax payable or a larger tax refund.
The largest part of the deduction is the interest portion of the mortgage. You can, however, claim Property Management fees, rates, loan costs and maintenance and repairs.
Negative gearing deductions are most beneficial to people in high income brackets where they are in the top marginal tax rate. This allows larger deductions when you borrow bigger amounts as you will pay more interest which is 100% tax deductible.
Everyone wants a large tax refund however you should never over commit to get one, you should always seek expert financial advice from a finance expert and accountant to make sure the purchase is within your budget and will benefit you in the long run whilst always being affordable.
Positive Gearing
Conversely positive gearing is where the income received is greater than the total amount of the expenses and therefore creates a situation where tax must be paid on the net income. Generally you will find a newly purchased negatively geared property will have better capital growth than that of a positively geared property.
What we aim to do for our investors is find property that will cost you a minimum to own but still have long term capital growth.
This will allow you to set the investment up and then forget about it until you need to use the equity from this property to purchase your next investment.