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  Negative Gearing...
 

Negative Gearing is a financial term where outgoings on an Investment Property exceed the income from an Investment Property, with the shortfall able to be offset against the taxpayers other assessable income.

The following Negative Gearing example is intended to show the benefits of using borrowings to purchase an Investment Property. The example below is intended for illustrative purposes only. Potential property investors should seek professional advise on all issues relating to borrowings, property deductions, depreciation allowances, and their own personal taxation position.

Potential property investors should also make their own inquiries as to how much a lending institution will lend them for the purchase of an Investment Property.

Purchase Price

$ 350,000
Deposit – 10% $

(35,000)



________

$ 315,000
Cashflow
Rental – assume $350/per week $ 18,200 pa
Interest – assume 6.5% interest only $ (20,475) pa


___________
Rental Shortfall $ (2,275) pa



Outgoings – Water $ (400) pa
Council $ (400) pa
Body Corp $ (1,400) pa


__________
Cashflow Shortfall $ ( 4,475) pa
Depreciation Allowances on renovation costs & appliances/fixtures & fittings
- assume $25,000 over 5 years $ (5,000) pa


__________
Tax Deduction $ ( 9,475) pa
Tax Refund – assuming 48.5% tax bracket $ 4,595 pa
Cashflow Shortfall – from above $ (4,475) pa


_________
Cashflow after Tax $ 120 pa
Capital Funds required to purchase the above property on 10% deposit are:
Deposit – 10% $ 35,000 pa
Stamp Duty – estimated $ 11,000 pa
Legal Fees $ 2,000 pa

__________
Total $ 48,000 pa

Mortgage insurance may be required by the Lending Institution. The typical cost of the above example is a one off fee of $2,500.

When a property is sold, including both investment properties and in some cases non-investment properties, Capital Gains Tax may be payable on any capital gain generated from owning the property. Potential property buyers should seek professional advise on such issues prior to buying any property.

   
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