Negative gearing verse positive gearing?
This is one of the most hotly debated questions in the property industry today.
Negative gearing is the term used when your investment property’s expenses are more than the income it generates.
At first glance you might ask why would anyone want to invest in a property where the costs are greater than the income?
The most common and immediate answer that comes to mind for most of us is to get a tax deduction.
Although this is one benefit of a negatively geared property, it should never be the sole reason to invest in a property.
Remember you only receive your marginal tax rate, on the difference between the expenses and income, back as a refund.
A number of factors need to be considered when looking to acquire a negatively geared property:
You need to consider how long you are intending to keep the property?
If the property was negatively geared at $15,000 a year for 5 years, you would have to sell the property for more than $50,000 (33% tax rate x 15,000 x 5years) to recoup the extra money you injected into keeping the property.
You also need to look at how long you intend on working for and what your income will be while owner the investment property?
You need to consider if the property should be purchased in your name, in joint names or in an entity.
An example of where this is important would be where a couple has one person working and the other not. If they had a negatively geared property owned in joint names they would only get half the available tax benefit.
If a negatively geared property is purchased in a trust structure, the loss must remain in the trust; however these losses can be accumulated and can be used to reduce a future capital gain.
Owning the property in only one name means that the person can take advantage of the negative gearing but will have 100% of the gain taxable in their name also, whereas if the property is owned 50/50 they share in the negative gearing and the capital gain
What happens when the property turns positively geared?
The three factors above still need to be considered but from a different angle.
For example if the property is now making you money you will no longer be getting a tax benefit but instead paying tax on the rental profit.
If you were a couple with one person working and the other not working or earning a low income, you would look at owning the property in the low income earners name to reduce any tax payable.
Each property buyer’s situation is different. Even if you have already invested in property, the factors above need to be considered as your tax situation changes.
At the end of the day, you invest in property to make a profit, so why wouldn’t you spend time at the beginning to consider the all of the factors relevant to your current and future circumstances.
This short term planing can help your profits stay in your pocket and not the tax mans.
More like this?
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- Why overspending too much on your own home to early can be a bad idea
Daniel is a qualified CPA and a partner at accounting firm Mulraneys. Daniel has more than 11 years experience as an accountant and focuses on supporting small to medium sized business, high net worth individuals and property investors.
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