Negative gearing and income tax: What you need to know
Negative gearing is just one of many useful tools that property investors can use to improve their ability to build wealth through property investment. It can help you manage debt, improve cash flow and rapidly expand your property portfolio - but why should you always keep your tax brackets in mind when using it?
How negative gearing works
For new investors or those who haven't utilised the services of the property mentors here at Think Money, you might be unaware of what negative gearing actually entails. It was a big election issue, so you've likely heard the phrase, but what does it mean exactly?
Negative gearing is the process through which a property investor purchases a rental property, but the income does not make up for the cost of owning the property. This loss can then be claimed against your taxable income, reducing it by that loss. So, if you made a net loss of $5,000, your taxable income would be reduced in the Australian Taxation Office's eyes by that figure.
Why your income level matters
Negative gearing has some serious benefits for the average Australian too; mum-and-dad investors in particular.
Using tax advantages may seem like something that only true property moguls are capable of doing, but the reality is that negative gearing has some serious benefits for the average Australian too; mum-and-dad investors in particular. And it's all got to do with the way your income is taxed.
According to the Australian Bureau of Statistics, the average income for an Australia per year is about $80,000. If you are already a savvy investor with positive cash flow properties, this might be a little higher. However, this also pushes you into a higher tax bracket - every dollar you earn over $80,000 is taxed at 37 per cent, rather than 32.5 per cent.
This is where negative gearing can help. If you bought a property to rent out but were making a net loss of $10,000, you can claim that against your taxable income, reducing it by that amount. Suddenly, your income is now below $80,000, so you are dropped into a lower tax bracket. And, all the while, you are (hopefully) building capital gains.
This is just one of the reasons why negative gearing is so popular - even among average Australians. You don't have to be a rich-lister to make money through property; you just have to know the right tools to use and have the right people on your side.
Here at Think Money, we can be the latter and teach you the former, so if you want to take your property investment portfolio to the next level, make sure you get into contact with us first.