Investment properties involve high, one-off and ongoing expenses, typically more than what would be covered by the rent itself.  It is these expenses that are a factor in negative gearing an investment property.

One-off costs include the initial deposit, mortgage set-up fees which include LMI (Lenders Mortgage Insurance, if borrowing is 80% more of the property value), stamp duty, solicitors and legal fees, and connection fees for utilities. 

On the other hand, Ongoing Costs are monthly property management fees, repair and maintenance costs, monthly mortgage payments with annual interest payments, quarterly council and water rates, quarterly body corporate fees, annual land tax, annual mortgage account-keeping fees, annual building insurance, and annual landlords insurance. 

The Ongoing Costs associated with an investment property can be a tax deduction. Non-cash deductions include the building’s depreciation, which is a cost that is shown on your tax return but it is not the one you really incur. Though getting a reduced tax rate is a great advantage, it is important to keep in mind that these gains will not become apparent for some time. 

Most negatively geared properties are located in areas of high demand and the potential for faster expansion. Property investors want to outperform the cost of holding onto the property in terms of growth. They can prosper over the long term by acquiring a number of properties in this manner. In some circumstances, the property’s rental income will rise over time and become positively geared. When this happens, you won’t pay anything to keep the property, but you’ll lose your tax benefits. 

Negative gearing is calculated by deducting the property or cash operating expenses, from the rental income which gives you the cash flow. Depreciation is deducted for new properties. With this data, we can calculate the impact on your taxable income and the amount of tax refund based on the tax rate.

If you need to know more about negative gearing, schedule a free consultation with our Investment Specialist today.