Negative gearing is a highly discussed topic throughout the property sector and is always brought into the spotlight at election time. As one of the deciding factors in an investment property, it must be considered when determining your investing strategy.
Before exploring depreciation and negative gearing, lets understand the basics.
What is negative gearing?
Negative gearing when the rental income is less than the property expenses. This essentially means that this property is making a loss (most likely on paper).
Just like any other property expense such as interest repayments and insurance, the loss from a negatively geared property is deducted from the investor’s income.
What is depreciation?
Depreciation is the natural wear and tear of a building’s fixtures and structure. Property investors can claim the decline in value as a tax deduction each year. It is an “on paper” deduction meaning that there is no cash outflow.
Depreciation can be claimed under two categories. The first being capital works deductions on the structural component such as walls, beams and floors. The second category is plant and equipment deductions on the easily removable assets like ovens, ceiling fans and hot water systems.
Benefits of negatively geared property
Many investors hold on to their negatively geared investment properties. Some even enter the market with the aim of having a negatively geared property.
But why would you want to have a property that is running at a loss?
There are two key advantages of negative gearing:
Long term capital gain. This means that you are holding the asset for it to improve in value over time, with the losses being trumped by the overall appreciation in the asset’s value; and
Reduction in your taxable income. If your investment property is making a loss (or an “on paper” loss due to depreciation), it offsets your taxable income leading to you paying less tax.
It must be reiterated that negative gearing does not mean that your investment property is in a cash flow deficit! You can achieve this rental property “loss” whilst still having more income than the expenses of the property. If you would like to find out more, contact Link Advisors and we can guide you through the process.