Arnold
CibbuanoA Closer Look at Negative Gearing
May 4th 2006 04:36
I briefly covered negative gearing in a previous post. I’m going to expand on it and offer some further advice.
An investment property that's negatively geared is purchased with a loan that has an annual net rental income amount that is less than the annual interest paid on the loan, plus the deductible expenses associated with maintaining the property. You get tax benefits by being negatively geared as you are able to deduct the costs of owning an investment property from your overall income. The biggest part of this deduction is the interest portion of your mortgage, but you can also claim such expenses as property management fees, loan costs and repairs. Negative gearing is favoured by people in the high income bracket as it is used as an income deduction to reduce an overall income into a lower tax bracket. Effectively lowering the taxable income and perhaps the taxable rate. It can be a dangerous temptation, the more you borrow, the more interest you pay and the greater your income deduction. However there are several points to consider when deciding your level of financial debt and commitment.
1) No matter how much you borrow, you still have to be able to make your mortgage repayments.
2) Tax benefits don’t kick into until tax time at the end of the financial year. You should not factor in negative gearing related benefits into your finances until the end of the financial year. That is to say, you must have enough earning potential or capital to last you until you can claim your taxation benefits.
3) In times of low inflation, the benefits of negative gearing are negligible.
4) Investors should be prepared for a worst-case-scenario. This includes becoming unemployed and unable to make repayments or not being able to rent the property for lengthy periods. Also to consider is the length of time it takes to convert a property investment to cash. The sale of a property can take months and there are expenses that are included in this transaction.
An investment property that's negatively geared is purchased with a loan that has an annual net rental income amount that is less than the annual interest paid on the loan, plus the deductible expenses associated with maintaining the property. You get tax benefits by being negatively geared as you are able to deduct the costs of owning an investment property from your overall income. The biggest part of this deduction is the interest portion of your mortgage, but you can also claim such expenses as property management fees, loan costs and repairs. Negative gearing is favoured by people in the high income bracket as it is used as an income deduction to reduce an overall income into a lower tax bracket. Effectively lowering the taxable income and perhaps the taxable rate. It can be a dangerous temptation, the more you borrow, the more interest you pay and the greater your income deduction. However there are several points to consider when deciding your level of financial debt and commitment.
1) No matter how much you borrow, you still have to be able to make your mortgage repayments.
2) Tax benefits don’t kick into until tax time at the end of the financial year. You should not factor in negative gearing related benefits into your finances until the end of the financial year. That is to say, you must have enough earning potential or capital to last you until you can claim your taxation benefits.
3) In times of low inflation, the benefits of negative gearing are negligible.
4) Investors should be prepared for a worst-case-scenario. This includes becoming unemployed and unable to make repayments or not being able to rent the property for lengthy periods. Also to consider is the length of time it takes to convert a property investment to cash. The sale of a property can take months and there are expenses that are included in this transaction.
| 61 |
| Vote |
subscribe to this blog
Advertise your property for sale/rent for Free on ZRealEstate.
View Properties : NSW | VIC | QLD | SA | WA | ACT | TAS | NT
Advertise your Properties : NSW | VIC | QLD | SA | WA | ACT | TAS | NT
Advertise your Properties : NSW | VIC | QLD | SA | WA | ACT | TAS | NT
