The Welsh Wizard & co

Can someone plezze explain to me what negative gearing is? ( in simple format.)
Many thanx LORI

ABCDiamond

An example relating to property.

You own a property, the costs for which come to $400 per week ( Mortgage interest, rates, Insurance etc.)

You rent it out for $250 per week - therefore losing $150 pw.

That is negatively geared, and the ATO allow you to reduce other taxable income by the rental loss to reduce your tax.

It would be "positively geared" if the Rent was higher than the costs.

Quinkana

Only to be contemplated when you think the rate of capital gains, after capital gains tax and buying & selling costs, will exceed the rate of loss due to mortgage plus depreciation plus tax saving less rent. Probably not a good time right now.

ABCDiamond

agreed

JackTheLad

Was that english?

Could someone explain it with an example, i.e. when it would be useful?

Cheers,
JTL

ABCDiamond

It's only useful if you can be sure that the property price (or other asset) will go up in price, by a figure greater each year than the money that you lose each year in costs that exceed the rent received.

eg: In my earlier example, the loss each week was $150 = $7,800 per year, then add to that other costs, Insurance, Rates, Maintenance etc, say $3,200 gives a total loss of $11,000 in a year. So if your asset increases in value by at least that, then it may be worth doing.

If the property above was worth $300,000 it would have to increase to $311,000 to effectively breakeven. A 3.67% increase

The current property market is wobbly, and may or may not make that. In some areas it should, but in others it may not.

Did that explain

Kiwipaul

Also if you make a loss of $7,800 on the property and you are a taxpayer you can reduce your income liable for tax by $7,800 as well so this is why higher income earners (and hence higher rate taxpayers) love it.

And you can also depreciate the house by (I think) 4% a year in Oz, so in the example for the first year you could also claim a depreciation allowance of $12,000 ($300,000 x 4%). This assumes the house is worth $300,000 not counting the value of the land as you cannot depreciate land.

So in this first year you could get an extra $19,800 tax free allowance which if you are a higher rate taxpayer (on 47% tax) you would save $9306 in tax.

ABCDiamond

It depends on when the house was built, it may only be 2.5%.
Date construction started:
Before 22 August 1979 = nil %
22 August 1979 to 21 August 1984 = 2.5%
22 August 1984 to 15 September 1987 = 4%
After 15 September 1987 = 2.5%
The ATO require a professional schedule prepared, and they also only work on the "Original" building cost.
My $300k QLD rental property only cost about $45,000 to build, although I do get 4%, but it only runs for 25 years from build date.

Kiwipaul

Must admit not to familiar with rules in Oz as my property is in NZ and their they don't require a professional schedule and you can depreciate the house from it's current value less land costs.

I also found it cost effective to have a chattels valuation done which valued all the fitting and fixtures when I bought it as some of these you can depreciate at a lot more than 4% and this doubled my depreciation claim per year.

Only problem is I cannot use this loss against any of my Oz income as it's not allowed and I cannot use it against any of my NZ investment income either as it only allowed against NZ earned income as far as I can see.

ABCDiamond

Sounds like NZ rule are better
Here the ATO even say "the component of your payment that represents the builder’s profit margin cannot be claimed"

I would have thought a NZ investment loss would be offset against NZ investment profits.

OzTennis

And if you work from or do work in your main home, rather than your negatively geared 2nd property (eg schoolteacher doing marking and preparation), you can 'set aside' a room in the house (eg one room out of seven) and claim a proportion of expenses such as electricity and depreciation of carpets, furniture, I.T equipment, professional library etc (1/7 of the total in my example) to further reduce your tax liability. Whether you actually 'set aside' a room or not probably doesn't matter - it is unlikely that an ATO official will come to your house to check that you have actually set aside a room specifically for work purposes! They will allow it if you have an occupation for which working at home is likely.

OzTennis

Has there been a thread suggesting ways of minimising tax liability in Oz? Seems like a good idea - not tax avoidance of course which is another thing altogether.

Kiwipaul

One thing to be aware of here if you claim say 1/7 of the mortage payments as a tax expense, when you sell the house they are liable to claim 1/7 of the capital gain is liable for tax.

Your ok claiming running cost just don't try and claim capital costs

JackTheLad

Yes thanks. And the stuff about using the 'loss' to decrease your tax liability, thats the bit that always confused me. Got it now ,

Cheers,
JTL

ABCDiamond

Are you considering buying an Investment property ?

Banksia

[QUOTE=JackTheLad]Was that english?

Could someone explain it with an example, i.e. when it would be useful?

It is also a migration test. If you don't understand it, you are not allowed to come.

Or stay.