How Negative Gearing Can Help You Save Tax and Build Wealth
Negative gearing is a strategy that involves borrowing money to invest in an asset that produces less income than the interest and other expenses you pay to maintain it. This creates a loss that you can claim as a tax deduction against your other income, such as your salary or wages.
Negative gearing is not limited to real estate investments. You can also use it for other types of assets, such as shares, bonds, or business assets. However, real estate is the most common and popular form of negative gearing in Australia.
Negative gearing can help you save tax and build wealth in the long term, as long as you choose the right asset, the right loan, and the right tax and financial advice. At MDB Taxation and Business Advisors, we are here to help you with all your negative gearing needs. We are your trusted tax agents and experts in preparing individual tax returns for property investors.
How does negative gearing work?
Negative gearing works by allowing you to reduce your taxable income by the amount of loss you incur from your investment. This means that you pay less tax overall and increase your cash flow.
For example, let’s say you earn $100,000 a year from your job and you buy a rental property for $500,000 with a loan of $400,000 at 5% interest. The property generates $20,000 a year in rent and costs $30,000 a year in interest, rates, repairs, and depreciation. Your net loss from the property is $10,000 a year.
Without negative gearing, you would pay tax on your $100,000 income at your marginal tax rate of 37%, which is $27,097 (based on the 2020 financial year rates). With negative gearing, you can deduct your $10,000 loss from your income and pay tax on only $90,000 at 34.5%, which is $23,325. You save $3,772 in tax and increase your cash flow by $314 a month.
However, negative gearing is not a free lunch. You still have to pay back the loan and hope that the value of your property increases over time to cover the loss and generate a capital gain when you sell it. You also have to pay capital gains tax on the profit you make from selling the property, unless you qualify for an exemption or a discount.
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How can MDB Taxation and Business Advisors help?
At MDB Taxation and Business Advisors, we can help you with every aspect of negative gearing, including:
- Explaining what you can claim, what costs are included in the cost base for capital gains tax purposes, and how negative gearing works for tax purposes. You can get this information when you book a negative gearing consultation with us.
- Helping you find the right property and the right loan that suit your budget and goals. We have access to a network of buyer’s advocates and mortgage brokers who can assist you with finding the best deals and options for your investment.
- Assessing the tax implications of your investment using a sophisticated software program that can create a 10-year cash flow analysis of the potential property, as well as estimates of taxable income and equity.
- Helping you apply for a PAYG variation so that you can receive your annual tax savings in your monthly pay packet instead of waiting for your tax refund. This can improve your cash flow and help you manage your loan repayments.
- Lodging your tax return on time and accurately with all the relevant deductions and credits for your investment. We will also help you deal with any queries or audits from the ATO.
We also take the stress out of dealing with negative gearing by helping you take advantage of all the benefits and opportunities it offers while avoiding any pitfalls or risks. With our assistance, you will have more time to focus on what you do best – growing your wealth.
Don’t let the complexity of negative gearing hold you back. Contact us today to learn more about how we can help you use negative gearing to save tax and build wealth. Trust us to provide you with the guidance and support you need to make informed decisions and reach your full potential.