Is Negative Gearing a sound financial decision for you?
Making the choice to financially gear an asset is influenced by a number of factors, and should be considered carefully. A quick chat to your accountant at STS Accounting Group will help you assess your personal situation – why not contact us today to discuss your Negative Gearing options?
If you’re new to Negative Gearing, here are a few background basics that may help you decide if this is a financial strategy for you…
What is Gearing?
Financial Gearing is the combination of debt and equity that is commonly used to fund investment in assets, for example, rental properties, shares or business assets.
The Gearing Ratio
A leveraged investment refers to the method of using borrowings plus an investor’s own funds to purchase an asset. The higher the leverage, the greater the debt. The mix of an investor’s debt to equity is referred to as the gearing ratio.
What is Negative Gearing?
A leveraged investment is referred to as positive when the net income derived from an asset exceeds the borrowing costs (mainly interest). On the other hand Negative Gearing is when the net investment income derived is exceeded by interest outgoings (and other funding costs).
Negative Gearing Real Estate
Negatively geared residential or commercial property is when the rental income minus the costs of owning and managing the investment property (such as depreciation, insurances, repairs and maintenance, council rates, land tax, travel costs and agent management fees) is exceeded by mortgage interest costs.
For tax purposes, the resulting rental tax loss can be deducted from an investor’s income derived from other sources, including salary and wages, other net rental income, dividends, interest and/or business income. Other deductions and considerations come into play where the property is located outside Australia.
Is it feasible to Negatively Gear?
Investments in real estate that generate an annual rental loss will be a tax deduction against other income. A tax refund to an individual investor generally arises at the individual’s marginal tax rate(s). The higher the marginal rate, the greater the refund. The tax refund reduces an investor’s net cash outflows from an investment.
In addition to the tax refund position, if the investment property increases at a rate greater than the after-tax loss position, then an investor will make money. However, it is also important to be aware that if the value of the real estate does not outpace investment’s cumulative after-tax losses, the investor will not be ahead financially. That is, an investor will lose money over the real estate ownership period.
Additional incentives for considering a negatively geared property investment are aiding cash flow through tax refunds, Capital Gains Tax discounts, rent increases over time, and other revenue streams such as AirBnb and Stayz.
With a number of potential pitfalls, negative gearing an investment property requires a sound strategy.
Before making any decision, contact STS Accounting Group for qualified and expert advice.
Just one conversation with one of our team could make all the difference to your future financial position.
Call us today. Torquay: (03) 5261 2262 Wincheslea: (03) 5267 2673
