What Is Negative Gearing?

With Negative Gearing always being the words used to describe the tax offset for investors, it still doesn't replace the more beneficial Positive Geared scenario, where it is straight income earnt from your investment. However when you are starting out it is a great tool to leverage. Sandwell's Residential Investors are highly experienced with saving our clients money using negative gearing.

By using Negative gearing as a strategy that offers immediate tax benefits while also offering long term gains in the shape of capital appreciation.

Tax Benefits

The Australian Taxation Office (ATO) allows property investors to offset an income loss (where property costs are higher than property income) incurred on a real estate investment against any other income. To explain how this works we need to work through the numbers based on a typical property (note: tax calculated based on 2003 tax rates)

John is a taxpayer earning $80,000 per annum (plus superannuation) in a contract job for a major IT company. He is thinking about purchasing a property for $230,000 (inclusive of $7,850 in closing costs). To maximise his available tax deduction he has been able to secure 90% finance on a 25-year principal and interest loan with a current variable interest-only rate of 6.7% per annum. He makes weekly loan repayments in advance. The developer has offered a 5 year rental guarantee at $250 per week. The rates and body corporate fees total $2,000 per annum and there's also an 8% rental management commission to be paid. We are going to ignore depreciation benefits for the time being. At the end of the first year, the profitability of John's property investment would be: