You’ve found an investment property that fits your long-term goals, you’ve crunched the numbers, and you’ve spoken to your broker. It’s clear that the property will not turn an immediate profit. However, that’s actually part of the plan.
How does that make sense?
Well, if your rental income is lower than your expenses, you might be able to claim tax deductions through negative gearing. Used wisely, this is one of those investment strategies that can reduce your taxable income and help you build wealth over time.
Here’s how it works:
Understanding Negative Gearing
Negative gearing is what happens when the cost of owning your investment property exceeds the rental income it generates. These costs include the interest on your loan, maintenance, insurance and management fees.
Rather than seeing this as a loss, savvy investors can use it to their advantage.
When a property is negatively geared, you’re essentially funding the shortfall in the short term, but you’re able to claim that loss against your other income at tax time. This can lead to a reduced tax bill, especially if you’re in a higher income bracket.
Maximising Tax Benefits
To make negative gearing work for you, you need to understand exactly what expenses you’re able to claim. These might include things like loan interest, property management fees, repairs and maintenance, council rates, insurance and depreciation on the building and assets.
When claimed correctly, these can significantly reduce your taxable income. However, the timing and documentation involved are absolutely critical, especially with interest-only loans or mixed-purpose borrowing.
That’s why you need to work with experienced advisors so you can structure your investment to maximise your entitlements without falling afoul of ATO guidelines.
It’s also worth noting that negative gearing works best when it’s paired with a clear, long-term strategy. You need to consider factors like capital growth potential, holding capacity and how long you’re prepared to sustain the cash flow gap.
Calculating Rental Yields
Before committing to negatively geared property, you need to have a realistic view of the rental income it’s likely to produce. This will help you assess whether the strategy is viable and sustainable for your situation.
First, calculate the gross rental yield:
Gross rental yield = (Annual rental income ÷ Property purchase price) × 100
Then, calculate the net rental yield:
Net rental yield = ((Annual rental income − Annual expenses) ÷ Property purchase price) × 100
With these calculations, you can determine whether a lower yield will still be attractive. This is possible if the capital growth potential is high, but you need to know your numbers.
Are you looking to make the most of negative gearing and boost your tax deductions? Speak to the experts at WPG Advisory today for tailored investment strategies that work for your financial future.