This is probably one of the areas I am asked about most frequently.
That’s why I am including it in this Bulletin.
So why all the fuss ?
Firstly, let’s examine what negative gearing actually is and then how it can benefit you or destroy you; yes, destroy!!!
The word negative means exactly that. You need to be in a minus situation to take advantage of negative gearing.
Gearing means borrowing money and being charged interest by the lender.
This money is then always used to invest – investments such as shares and residential or commercial property.
Shares provide you with dividend income and property provides you with rental income.
In both cases, negative gearing occurs when the interest being charged by a lender is much, much more than the dividends or rentals you receive.
In other words you have incurred a LOSS.
Now, because you have incurred a loss in the production of taxable income, the tax laws allow you to deduct this loss from all other taxable income that you have received such as your wages.
This has the effect of reducing the amount of tax you pay and in some cases, increase the amount of your tax refund.
This sounds great. But let’s look at the maths.
Assume you borrow $100 000 at 7% interest per annum.
You buy an investment property that gives you a rental income of $100 per week.
By the way, your tax bracket rate is 30%.
Income 52 x $100 = 5200
Interest 100 000 x 7% = 7000
You have lost : 7000 – 5200 = 1800
Taxes are reduced by :
1800 x 30% = 540
So in effect you have only lost :
1800 – 540 = 1260
The bottom line of all this is you have still lost $1260.
Why in a million years would someone want to lose money?
It’s cheaper not to do anything – I’m sure the maths proves it.
Yet there are 100s & 1000s out there that believe in it.
About The Author
Warren Kruger is an Australian Tax Specialist and Advisor. For a FREE Report "7 Essential Strategies to Reduce Your Taxation NOW!" Sign Up RIGHT NOW in the above right Opt In Box
Warren Kruger is an Australian Tax Specialist and Advisor. For a FREE Report “7 Essential Strategies to Reduce Your Taxation NOW!”,enter your name and email address in the Opt In Box located on the top right hand side of this article.
{ 1 comment }
I have no negative gearing, however in the example given it seems obvious that if the property value increased by 5% per annum your investment makes $5,000 over 12 months so your loss of $1260 is actually a profit of $3,740. This doesn’t seem too bad using someone elses money. Am I missing the point?
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