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Negative Gearing Investment Property in Australia

What is Negative Gearing? Simply defined:

"Negative Gearing is the capacity to claim losses as Tax Deductions when there is an expectation that in the future Profits Will Be Made."

The important words are "Tax Deductions". Below is an overview of these deductions and how the investor is able to take advantage of them to create their own real estate portfolio.
 

The short fall between the rental income and the loan repayment, rates/insurance/maintenance and letting fees are 100% tax deductible in that year.

Deductions on Purchasing Costs
(Tax deductible
over 5 years)
  • Valuation Fees
  • Stamp duty on Mortgage
  • Bank Application Fees
  • Mortgage Insurance
  • Consultancy Fees

Depreciation Costs
  • Building Costs (2.5% p.a. over 40 years)
  • Fixtures & Fittings
  • Furniture
  • Inspection Costs (100% write off annually)
  • Other acceptable costs (as per tax schedule)

Negative Gearing of investment property was introduced by the governments of Australia and New Zealand to encourage income earners to purchase investment property. Negative gearing has resulted in many positive outcomes for both economies including enhancing the availability of rental property to low income earners.

The main reasons behind the introduction of Negative Gearing are: Firstly, many industries within the economy rely on building and development. Not just people employed directly, but also factories etc. who make the products used by builders and developers (this factor has been emphasised recently with the Federal Government's introduction of the $14,000 first home buyers grant).

The second advantage to governments is the relief of pressure to supply and maintain housing for people who are not in a position to purchase their own home, thereby saving millions of dollars in funding plus mammoth administration and infrastructure costs.

Thirdly, approximately 34% (and growing) of the population rent. An under-supply of rental property would not only push rents up (giving rise to inflationary pressure and unhappy electorates), it would also put further pressure on the government housing supply.

To encourage the private sector to invest in property for rental, governments have made available extremely viable tax incentives for the investor.

Negative Gearing and Taxation. The following tax implications may apply when considering property investment.

1. Income Tax: Rental income is subject to income tax and may make you liable for provisional tax.

2. Capital Gains Tax: Capital gains tax is payable on the sale of investment assets which were purchased after September 19th 1985. The tax is payable on the gain in the value of the property. The family home is excluded from this tax.

3. Tax Deductions for Expenses: A distinction is made between purchase costs and finance costs. Costs incurred in purchasing a property such as legal costs, search fees and stamp duty ( on purchase price) cannot simply be deducted as expenses. However, these costs are taken into account for calculation of capital gains tax after the sale of the property.

It is important that careful records are kept of all related expenses. Finance costs such as loan establishment fees, valuations and related legal fees and stamp duty however, can be deducted from your income over a period matching the loan up to a maximum of 5 years.

Other regular expenses which are accepted as tax deductions each year include insurance, council rates, strata company levies and property management fees.

Repairs and maintenance costs are also allowable as tax deductions. However if the repairs amount to a capital improvement, such as replacing a wood framed carport with a new brick one, then you cannot claim a deduction because this is considered to be more than just repair and maintenance. Also initial repairs and maintenance may not be tax deductible in some cases. Generally speaking initial repairs and maintenance costs are considered part of the purchase price of the property.

4. Depreciation Allowance: If the investment property was built after 17th July 1985, the investor can claim depreciation of the asset as a tax deduction (at 2.5% of the cost of the building). Also allowable as a tax deduction for depreciation are some household items which are not fixtures including the hot water system, stove, curtains and blinds.

5. Negative Gearing: As already explained. If the tax deductible expenses from the property investment are greater than the rental income the excess tax deductions can be offset against income from other sources as salary or investment income.

6. Land Tax: Land tax is payable on the value of the land applying to an investment property owned as at 30th June each year.

7. Stamp Duty: Stamp duty is taxable by the buyer on the value of the property at the time of purchase.

(Source: REIWA Property Investment Guide to Negative Gearing)

info@harcourtsfremantle.com.au     (08) 9335 8411