Property Gearing and Taxation
“How does property gearing relate to taxation?”
Negative Gearing is a common term, yet, many people do not fully understand the taxation benefits involved. With this strategy the loss is a tax deduction which, in most circumstances, translates into a taxation benefit, generating a tax refund for the investor. This refund is then applied to your regular outgoings and forms the “after tax” cash flow.
For example, first year annual figures for a typical negatively geared rental property (based on a purchase in February 2008 with a property value of $380,000 and loan amount of $400,965) would look like this:
| Rental income $360 per week | $18,720 |
| Less Expenses: | |
| Interest and Rental Expenses | $33,280 |
| Rental Expenses | $4,377 |
| Depreciation of building (NON-CASH) | $5,000 |
| Depreciation of fittings (NON-CASH) | $7,513 |
| Loan Costs (NON-CASH) | $2,793 |
| Total Deductions | ($52,963) |
| Net income before tax | ($34,243) |
| Less additional tax refund (assuming 41.5%) | $14,211 |
| Less NON-CASH deductions | $15,306 |
| After Tax Cash Flow | ($4,726) |
| Weekly shortfall | $91 |
As can be seen the tax refund/credit of $14,211 reduces the annual cost of the investment resulting in a net negative cash flow of $4,726. The NON-CASH deductions of loan costs and depreciation are brought to account for tax purposes, but no cash outlay for those items occurred during the year. The cash outlay for those items occurred at the beginning of the investment project. The deduction merely recognizes the declining values for wear and tear of the building and the fixtures and fittings contained within.
Post by Guest Writer David Maynard – CEO of My Tax Zone
Filed Under: Investment Strategies • Tax Tips
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