Negative gearing made easy

Negative gearing made easy
There's always a lot of talk about negative gearing. Most of
it makes the whole thing sound extremely complicated. But
really, it's quite simple.

By Glenn Murray *

The government knows property investment is good for the
economy. They also know it can be hard on your cash flow. In
order to encourage investment, they provide tax breaks for
investors.

Negative gearing simply means using those tax breaks to help
you pay off your investment.

So how does it work?
If you spend more maintaining your property than you get
back in rent, you're officially making a loss.

To help you cover the loss, the government lets you claim it
as a tax deduction.

For example, Mary earns $60,000 a year. She has an
investment property with yearly rental expenses and income
as follows:

Income
Rent ($250/wk) = $13,000
TOTAL = $13,000

Expenses
Interest on mortgage repayment ($1400 / mnth) = $16,800
bank fees = $100
accountants and solicitors fees = $500
repairs and maintenance = $2,000
insurance = $200
property management fees = $1,000
purchases of property related magazines and journals = $120
cleaning and gardening costs = $1,000
rates = $1,400
TOTAL = $23,120

TOTAL LOSS = $23,120 - $13,000 = $10,120

Mary's loss is $10,120. When she does her tax return, she
claims this loss as a tax deduction. This reduces her
taxable income from $60,000 to $49880. Instead of being
taxed about $16480, she will now be taxed about $12092. She
has made a tax saving of $4748.

Mary can choose to have this money refunded in a lump sum,
or she can have it refunded in weekly instalments.

Either way, she can use it to pay off her loan. Instead of
having to cover $10,120 out of her own pocket each year, she
only has to cover $5372 ($10,120 - $4748). That means she's
only paying about 23% of the cost of her investment
property. Her tenants and the taxman are paying the rest.

Using Negative Gearing, your tenants and the taxman are
paying the lion's share of your mortgage for you. And if
you've invested wisely, your property should be increasing
in value the whole time.

DISCLAIMER: This information is not financial advice. It is
provided only for the purposes of illustrating the concept
of negative gearing. The calculations used are estimates
only. Please consult a financial advisor before investing.

* Glenn Murray heads copywriting studio Divine Write. He can
be contacted on Sydney +612 4334 6222 or at
glenn@.... Visit www.divinewrite.com for further
details.