Negative Gearing for rental properties

Working out if your property will be negatively geared is easy.  Simply total your estimated expenses and subtract these from the expected income.

When calculating the total expenses you will need to keep in mind that some expenses are fully deductible in the year you incur them, while others are deductible over a period of time.

Below is a list of some of the more common expenses that can be claimed as an immediate deduction:

•  Advertising for tenants
•  Body corporate fees and charges
•  Council rates
•  Water rates
•  Land tax
•  Cleaning
•  Gardening and lawn mowing
•  Pest control
•  Insurance (building, contents and public liability)
•  Interest expenses
•  Property agent’s fees and commission
•  Repairs and maintenance

Those expenses which may be claimed over a period of time include:

• Depreciation
• Capital works deduction on building
• Borrowing costs

Depreciation and capital works write offs are much the same.  Depreciation is the write off over time of assets purchased for use in your rental property (i.e. furniture if you rent the property as ‘fully furnished’) whereas a capital works write off is the write off over time of the property itself.

We often recommend that our clients purchase a Quantity Surveyor Report (sometimes also referred to as a tax depreciation schedule) to ensure we are claiming the maximum depreciation and capital works deductions for their property each year.

These are expenses directly incurred in taking out a loan for the purchase of a rental property and include loan establishment fees, mortgage broker fees, fees for a valuation required for a loan approval etc.  If your total borrowing expenses are more than $100, the deduction is spread over a period of 5 years or the term of the loan, whichever is less.

As mentioned earlier, when a property negatively geared, it means the cost of owning it is more than the income it generates.  Because this strategy returns a loss it can seem risky – but there are other benefits that can add up in your favour overall.  For example, you can deduct the loss from your taxable income.

While you’re making a loss, your property’s capital value is (hopefully) growing.  Negatively geared investors are banking on their overall loss being offset by their property’s potential capital appreciation.  Keep in mind also, there may be tax implications (like capital gains tax) that you’ll need to factor in if/when you sell.

Saving tax shouldn’t be the only reason for choosing an investment strategy, but it’s definitely worth factoring in as you weigh up the options.

As well as the advantages of negative gearing there are also negatives that should be considered.  This was briefly mentioned before – you’ll need to have enough cash flow to cover your losses until tax time comes around each year.  Before you negatively gear a property, make sure you can afford the ongoing out-of-pocket expenses.  If rates go up, you can’t offset the added expense by simply increasing your rent – and you don’t want to be forced to sell your investment property before your capital grows.

Before purchasing a property, whether it be positively or negatively geared, it’s always a good idea to run your plans by us so we can advise of any other tax implications there may be.  We can also advise on the best entity for your purchase to ensure you are maximising your investment.