A Guide to Negative Gearing
The process of borrowing money or getting a loan to invest is known as ‘gearing’. Owning multiple Perth investment properties or investing in a high value property such as an apartment complex or property in a popular location can lead to greater interest on your loan. In addition to expenses on your property, the amount accumulated in interest costs affects whether positive or negative gearing applies to your investment. So, how can negative gearing benefit your investment? And how can you maximise the tax benefits?
Types of gearing
Gearing is the process of getting a monetary loan to finance your investment and is a common occurrence when investing in property. The type of gearing associated with your investment property will be determined by the amount of income earned from your investment.
The profit on your investment property is largely affected by rental returns. If the level of rental payments exceeds the associated costs of the property (interest repayments or maintenance costs), the property will be positively geared.
On the other hand, your investment property will be negatively geared if the associated costs of owning the property exceed the overall income or rental returns received.
When the outgoing expenses are equivalent to the returns on investment, the property will be considered neutrally geared.
Is negative gearing a good thing?
Capital growth and negative gearing: For property investors who are looking for a long-term investment option, negative gearing can still lead to a positive return on investment. Over time, your property should be going up in value, which will eventually lead to a profit when it comes time to sell. In the case of negative gearing, investment property that is operating at a loss can still be profitable if the increased value of the property exceeds the overall loss the property has been operating at.
Tax benefits of negative gearing: Due to the structure of our Australian taxation system, negative gearing on an investment property can actually be a positive thing. Under Australian tax law, you have the ability to claim portions of your loan repayments and other associated costs come tax time. This is one of the major benefits of negative gearing; if your investment is operating at a loss, you may be able to offset this loss against your other taxable income such as your salary. Therefore, your overall taxable income will be lower, reducing your required payable tax. So, a loss is not always a loss in Perth property investment.
Capital growth is defined as the amount your investment property appreciates in value since the original time of purchase. This return on investment is only accessible after the property is resold, unlike rental yields that are payable throughout the investment. Before investing, you should decide on your overall property investment strategy as to whether you want to invest in a property for long-term capital growth or for rental yield.
Expert advice from your Perth property managers
Getting informed advice and support from property professionals is the key to maximising your returns on your Perth investment property. The Perth property management team at Rentwest are committed to assisting property investors in making the most out of their investment properties. Whether it’s getting the best possible rental rate or ensuring your rental property is well managed, the Perth property management team at Rentwest can help you maximise profits from your investment.
To find out more about Rentwest’s services and property management solutions, contact us via our website or call our Perth team on 08 9314 988.