Negative gearing calculator

The Negative Gearing Calculator allows residential property investors to see the possible tax benefits of owning a negatively geared investment property.

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Is a negatively geared investment property right for you?

When a residential property investor borrows money from a lender in order to fund an investment property – which is the purchase of a property that will be used as a rental rather than the buyer’s primary residence – it becomes open to a financial strategy called ‘gearing’.

In other words, the buyer will use the loan from the lender as a means to generate an income, and the government will allow some tax deductions related to owning that property.

If the investment property generates a profit, and these returns are substantial enough to be able to cover the costs associated with the running of the property, including covering the interest repayments attached to the loan, the property will be ‘positively geared’. Any income that is earned over and above the costs of running the property, will be subject to income tax.

On the other hand, the property can also be ‘negatively geared’. This is where the costs of owning the property are greater than the income received. These additional costs can be claimed as a tax deduction against your rental income.

What is negative gearing?

If the rental return or the rental income is not substantial enough to cover the total costs of managing the rental and re-paying the interest potion of the loan, the investment property will be ‘negatively geared’.

At first glance, a negatively geared property won’t sound too appealing to an investor who is ultimately focused on maximising their rental income and paying off both the interest and principal portion of the investment loan in each monthly repayment.

But how can a negatively geared property ultimately put you as the investor in a better financial position?

Generally speaking, a negatively geared investment property can provide potential tax benefits for you as the investor when the time comes for you to lodge your yearly tax return.

This is simplistically how it works:

You own an investment property that costs you $500 per week in mortgage interest repayments. You spend a further $200 per week on council rates and water, property management fees, insurance and repairs. In total, you are spending $700 per week.

In addition, you have a depreciation schedule prepared, which allows you to claim $150/week in depreciation losses.

The rental income received is $600 per week.

Therefore, your total costs per week = $700.

Your total on-paper, tax claimable costs per week (inc depreciation) = $850.

Your rental income = $600.

The difference you can claim for negative gearing = $850-$600 = $250.

You can therefore claim $250 per week against your income tax. If you are paying tax at the rate of 37% + 1.5% medicare levy, you would receive a tax refund of $96.25 per week.

The property initially costs you $100 per week out of pocket. After your tax refund of $96.25, the actual cost is just $3.75.

Earning a tax refund through negative gearing

When you own a rental property, as long as the property is rented out to tenants, the interest repayments attached to the investment loan and certain outgoing property costs can be claimed in your tax return.

Furthermore, any losses that are incurred from a negatively geared rental property can be offset against your yearly income. This will work to lower your total taxable income, and consequently, the amount of tax you will be required to pay.

Some property investors find that this strategy works to help them reduce their overall tax bill, whilst enabling them to own an asset that will ideally increase in value over time.

Whether this strategy will work for you relies on a number of factors. It primarily comes down to what your yearly salary is; your rental property’s outgoing costs and fees; the amount of interest you are paying towards the loan; and in which tax bracket your total taxable income will sit in after you factor in the rental income your investment property has generated. So, there are a few calculations and number-crunches to be made!

Investors who have a higher salary are generally more aligned to choose for their investment property to be negatively geared, as they can claim for any losses against their total taxable income, which will work to diminish the total amount of tax they are to pay.

Some investors may consider it more beneficial to have their rental property positively geared, especially if their total income happens to sit them in a lower tax bracket. Being able to comfortably generate more rental income will increase their ‘borrowing power’ and allow them to put down extra repayments towards the loan.

This can consequently work to increase their equity, reduce the total amount of interest paid on the loan, cut down their loan term, and financially propel them into purchasing their next property if that’s desired.

Deciding between your rental property being negatively geared or positively geared will all depend on your financial circumstances and residential property investment goals. But the bottom line is: you don’t want to be missing out on a more advantageous investment strategy and paying more tax if you don’t have to.

To make an informed decision, it is advised that you employ a qualified and professional mortgage broker and financial adviser who is deeply experienced in helping you determine the geared investment type that works in your favour.

About the negative gearing calculator

Your Mortgage’s Negative Gearing Calculator can help in revealing the possible tax benefits that may be available to you as the residential investor if you decide for your property to be negatively geared.

Firstly, you will need to provide the calculator with the purchase price of the residential investment property, the total amount you will take out on the investment loan, the loan term or length of the loan, and the fixed interest rate that will be applied to the loan.

You will then be asked to provide details of the investment property’s yearly rental income or rental return, as well as your annual salary and other taxable income.

After this, you will need to provide details of the cash expenses per annum that are put towards the up-keep or management of the property, which includes the strata fees, council rates, land tax and repairs and maintenance costs.

How much can I save on taxes with negative gearing

Depending on your circumstances, you could end up saving a few thousand dollars on your yearly tax return if your residential investment property is negatively geared, so it’s well worth doing the extra research and seeking the professional advice!

A great example of negative gearing

Using the calculator, we put in the following amounts:

Initial figures

  • $700,000 purchase price
  • $630,000 loan
  • 30-year loan period
  • 4% interest rate, interest-only
  • $600/week rental income
  • $100,000 annual salary

Ongoing costs

  • Council rates $2000
  • Strata fees $2000
  • Insurance $500
  • Property manager fees $1500
  • Repairs and maintenance $ 1000
  • Land tax $0
  • Water rates $1000
  • Depreciation: $7000

Your estimated results:

Your estimated tax benefits are +$3,510.00/year, and your cash flow after tax is +$29.04/week (+$1,510.00/year).

About this calculator

The results provided by the calculator are to be taken as a reference or guide only. Results only rely on the information provided. The calculator doesn’t factor in that interest rates can alter or fluctuate throughout the entire life of the loan.

It should also be noted that results do not indicate the future financial circumstances of a buyer or their future tax return, nor do they act as a determiner.

A formal assessment should be independently sourced, ideally in consultation with a tax specialist, financial adviser and/or mortgage broker.

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