Negative Gearing: This is a popular strategy recommended by many accounting professionals to save tax, as it allows you to lower your overall taxable income by owning an investment property with negative gearing.
But negatively geared means your expenses to maintain the property is more than the rental income you get. Basically this means you are losing money to get a mere tax benefit, because you can only claim about 30% of your investment expenses depending on your tax bracket.
Then should we buy a positively geared property? No. Because most positively geared properties are apartments, units or rural houses that do not grow much in value. And also we have to pay tax for the extra income generated by them.
So what can we do? We need to invest in positive cash flow properties
What are positive cash flow properties? If you buy a house less than 40 years old, you can claim depreciation (value reduction due to wear and tear) of the building as an expense. Even though we don’t pay that money from our pocket, depreciation is regarded as a loss for tax purposes. So at the end, if you can claim non – cash items like depreciation and LMI (Lenders Mortgage Insurance) our property becomes a cash flow positive property. That means we gain a profit.
So if you are buying an investment property, make sure to look for a cash flow positive property. Even though it is difficult to find cash flow positive properties that have potential to grow in value over time in certain capital cities due to high interest rates, there are still some states where you can aim to buy property that grows in value with minimal cash loss. Make sure you run the numbers utilising a reliable cash flow calculator before buying any investment property. If you would like to know how your numbers stack up, don’t hesitate to call me on 0422 621 187.
Please note that this is just general information to make awareness of the possibilities, for all your tax and financial advice please refer to a qualified tax practitioner/Accountant. Also seek advice from a qualified mortgage broker to access your borrowing capacity before embarking on property search.
