Negative Gearing Explained

For Property Investment NZ it is always important to keep up with current laws and taxation requirements, so before structuring any property deals you should consult with an expert. According to Wikipedia – Negative gearing is a form of leveraging where a purchaser borrows money to buy a property, but the income generated by the property does not cover the interest on the loan.

A negative gearing strategy can only make a profit if the property value rises so much in price that the capital gain is more than the sum of the losses over the life of the property. The purchaser must also be able to fund the planned shortfall until the asset is sold.

The different tax treatment of planned ongoing losses and possible future capital gains affects the investor’s final return. This leads to a situation in the countries which tax capital gains at a lower rate than income. In those countries it is possible for a speculator to make a loss overall before taxation, but a small gain after taxpayer subsidies.

Negative gearing or borrowing means you are making a loss for tax purposes. Take the following example –

$200,000 property with a 10% deposit, means that borrowing = $180,000
Rental income @ say, $300 per week = $15,600

Interest @ 7% on $180,000 = $12,600

Other expenses (rates, insurance, legal etc) = $3100

4% Depreciation on property = $ 4,000

Depreciation on chattels = $ 4,500

Gain/(Loss) = ($ 8,500)

The total tax loss comes to $8,500. Because you have paid these ‘losses’ with after-tax dollars you are entitled to offset these losses against taxation you have paid on your PAYE. So, $8,500 x .39 = $3,315. This is the tax you would get back in your tax return assuming you pay the highest rate of tax.

This is a great position to be in – as even though the property is basically cash flow neutral, the tax benefits add up to a decent amount. And all the time you are getting tax-free capital gain on the property.

Some rental property investors suggest that in this scenario the property should be in the highest income earners name to make the most of negative gearing. But this may not be an issue if you have your business set up as a company.

If you are considering investing in property, and the benefits are real, then talk to PropertyTutors today and see the great results that they have achieved.

For further reading on Property Investment NZ, click on the articles below:

Setting Goals for Financial Independence – click here

Tips for Becoming a Property Expert – click here

Buying Rules for Property Investment – click here

5 Tips to Add Value through Renovation – click here

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