‘Gearing’ means borrowing to invest
Negative gearing allows you to buy investment property without using your own money. It means the cost of owning the property—maintenance and interest on the loan—is greater than the income you receive from the asset. You can claim the loss, or negative difference, as a tax deduction on your overall income.
Here’s how it works:
| Without investment property |
With negatively geared investment property |
|
| Annual salary | $100,000 | $100,000 |
| Rental income | — | $20,000 |
| Total income | $100,000 | $120,000 |
| Tax deductions (property costs and interest on the loan) |
— | $27,000 |
| Taxable income | $90,000 | $93,000 |
| Tax payable (inc. Medicare) | $26,697 | $23,967 |
| Tax savings from negative gearing | — | $2,730 |
Note:
The above figures are based on a set of assumptions and are meant as a representation only.
The actual result will depend on each person’s circumstances.
Assumptions:
- Property value: $450,000
- Loan: $360,000 at 7% Interest
- Rent: Gross rent at 4.44% of value and net rent at 3.24% of value
- Depreciation on Fixtures & Fittings of $2,000pa
- Tax Rates: Applicable for Year Ending 30th June 2013 with standard medicare levy of 1.5%.