How Much Can You Claim on Negative Gearing?

Negative gearing is a contentious issue in property investing in Australia. Many investors utilise it to make property investing a profitable, long-term investment opportunity. But how much can I claim in a negative gearing, and will it impact my overall taxes? 

In this article, we will:

• Cover the Ins and Outs of Negative Gearing
• Go Through Key Items That Can be Included
• Cover a Few Items to Remember When Starting Out

What is Negative Gearing?

In Australia, “gearing” is borrowing in an attempt to make an investment. Real estate investing is most prevalent, but gearing can be for stocks and even for assets in general. You have a negatively geared property when expenses for holding that investment property exceed its earnings. 

That difference – the shortfall – frequently turns into a tax benefit as you can claim that loss against your other earnings.

Negative gearing is a widespread feature of the property marketplace in Australia. Some investors view it as a profitable tool for less-taxed earnings and property portfolio creation. Others claim it skews housing affordability. Whatever your position, negative gearing is a legal and prevalent taxing tool.

What Sort of Costs Can I Claim?

To calculate how much you can claim for your negative gearing, you’ll have to include all allowable expenses for your investment property. Allowable expenses can include:

• Interest Payments: That portion of your mortgage payments (but not your principal payments) is most commonly the biggest expense. In an interest-only mortgage, your whole payment could be a claim.
• Council Rates and Utilities: In most instances, you can claim council rates, water, and similar levies for your investment property.
• Land Tax: According to your property value and your state or territory, you could pay land tax. That expense can be claimable when it’s for an investment property.
• Management Costs: Most investors have property managers collect tenants and sort yot minor troubles. Management fees and incidental expenses can generally be claimed.
• Maintenance and Repairs: Wear and tear comes with any property, and most actual expenses of repairing can be claimed. But make a differentiation between a repair (reverting an article to its first t form) and an improvement (addition to, not restoration of, a property). Most improvements fall under capital expenses and have to be depreciation over a period.
• Insurance: Building cover, contents cover (for items that you include in a rented property that’s been furnished), and even a cover for your property (landlord cover) can generally be claimed.
• Depreciation of Assets: If your property consists of fixtures and fittings (e.g., carpet, machines, or machines for air conditioning), depreciation for such assets can be claimed according to the ruling of the Australian Taxation Office (ATO).
• Travel Costs (Restricted): Allowance for travelling and restrictions changed a couple of years ago. Individual investors cannot claim such expenses for travelling and, therefore, refer to the present ruling of ATO or seek an expert’s advice in case of uncertainty.

Calculating your Negative Gearing Amount

We will use an example for demonstration purposes. Let’s say your scenario is:

• Rent received: $20,000
• Interest for your investment loan: $15,000
• Management and insurance: $2,000
• Rates, water, and general charges: $2,000
• Maintenance and repairs: $1,000
• Depreciation of assets: $1,500
• Other general expenses: $500

The expenses totaled $22,000. Deduct $20,000 (rent received) from $22,000 (expenses incurred), and your position will stand at a $2,000 loss. You can claim that $2,000 as a loss and claim it in your overall assessable income, and your burden of taxes for that financial period will lessen.

Limitation and Requirements

Negative gearing isn’t a free pass for less taxes for yourself. There must be requirements for your compliance to ensure your claims are legitimate. For example:

1. Must Be Used for Rental Purposes: You cannot claim expenses for a property kept for your sole private use. The ATO often checks that you have made a genuine attempt to keep rental prices at a fair and proper price.
2. Record Keeping: Have your invoice, receipt, statements for your loans, and documents for claims in case of inquiry at times life. Misclassification will generate penalties.
3. Capital Costs and Straightaway Deduction: High-value improvements fall under the capital cost class, and depreciation must be claimed instead of a straightforward deduction. Again, misclassification can cause disputes and penalties.
4. Personal Use Costs: If a portion of your property is for private use, or your principal residence is leased, your claims will have to be adjusted.
5. Travel Cost Limitation: Individual investors cannot claim for maintenance and inspection trips, so they should carefully consider new rules introduced in recent tax reforms.

Risks and Considerations

Negative gearing isn’t a path to wealth overnight. Remember to always consider the dangers first before making a decision to invest.

• Interest Rate Hikes: With a big mortgage, increased interest can increase your repayments. The gap between your expenses and your rent can widen, and with it, you’ll have an even larger annual loss.
• Renting Out: If you have a period of vacancy for a few weeks or a few months, your property earns no rental income, but your holding and mortgage expenses don’t cease.
• Fluctuating Markets: House prices don’t necessarily rise steadily. In some regions, property values stabilise or fall, and in a downturn, your planned resale can mean less equity, and in the worst case, negative equity.
• Tax Rule Reforms: Negative gearing has faced scrutiny from policymakers and the general public. There’s a constant risk legislation will reform, and your scheme will no longer be profitable.
• Cash Flow Strain: Recurring shortfalls can hurt your immediate budget, especially when your private affairs change. Ensure that your budget can fund the negative cash flow prior to investing.

So, How Much Can You Claim

In theory, you can claim any expenses over your rental earnings that meet the requirements of the ATO. There isn’t a minimum level for a loss through negative gearing, but don’t forget your actual benefit will vary with your margin for tax and overall annual earnings. That $10,000 property loss won’t necessarily mean a $10,000 tax refund, for example.

Rather, your $10,000 reduces your assessable earnings, and your reduced assessable earnings mean your tax liability reduces according to your tax bracket.

For example, assuming you’re in your 37% margin, your $10,000 loss will save you $3,700 in tax, assuming nothing else comes in between. That’s a broad example, and your actual position could vary with other allowable items, offsets, or your individual circumstances.

Conclusion

Negative gearing can work for your benefit, but only when utilised in a proper manner and when you’re aware of the risks. It allows you to offset losses on your investment property against your regular income, which reduces your immediate tax burden.

You can claim your loan, maintenance, depreciation, and various additional expenses in working out your annual property loss. If you’d like to know more about navigating the various risks and how to invest in property overseas, don’t hesitate to use Upscore’s FinancePassport today!