Have you ever come across the term "negative gearing?" It is frequently used in relation to a rental property and if you've just purchased a home or a flat for this purpose, you need to become acquainted with the lingo. What do you need to know about negative gearing and how can you ensure that your rental property is net positive?

Negative Gearing Defined

Negative gearing means the difference between income and expenditure in broad terms. You need to calculate how much rent you will get in in relation to the property and then subtract expenditure related to your loan interest (if any) and direct costs. Your direct costs may be sizeable in their own right and include repairs and maintenance, local rates and management fees — if you outsource this task. You will need to be careful and include every single valid cost so that you can eventually maximise your advantage.

Turning It Around

It's not unusual for a property to be negatively geared in this way, especially as the rental market across Australia is quite tight right now. However, you can turn all this around by taking advantage of property tax depreciation, which is calculated at the end of the year. This can add up to quite a significant sum and when you add it to your personal tax return, can easily trigger a refund.

Remember, that your refund will also relate to a "net" tax payment, so if you recalculate based on your actual tax rate, then the situation will appear to be even rosier.

Calculations

Depreciation is calculated in two different ways. Firstly, you can claim for the building itself and secondly for the plant and equipment within. Usually, a quantity surveyor is retained to make the depreciation schedule and they will account for each and every asset contained within the property. An accountant will then be able to apply the calculations to your personal tax return when it is submitted to the ATO at the end of the year.

Join the Club

Many people in your situation will encounter some negative gearing when they first take a look at their accounting ledger. However, most of them will get a sizeable tax refund, which can make their investment well worthwhile.

Working with Experts

Always work with a tax consultant to help determine your property tax depreciation whenever you engage in this type of property transaction. They will ensure that you calculate carefully and leave nothing to chance.