Growing up, we all may be able to share a fond memory of close relatives utilising a rental property to generate income. Most of them were good memories, and it drives us to follow in the footsteps of our relatives and achieve similar success. The question poises, were they getting the most out of their rental properties? Could they have done more, could we be doing more?
Where it’s relevant and appropriate, negative gearing can provide significant tax benefits. Negative gearing always has been something that has been known of, but not fully understood. The short of it is; when the income generated, does not initially cover the interest and on the loan and expenses related. The property generally only remains negatively geared for the first few years of the property. When this sort of strategy exists on a property, the losses are deductable on the owner’s personal income, which can attract high tax benefits for the home owner.
Negative gearing your asset comes with benefits additionally to claiming your related expenses; if the property is held for longer than 12 months, a 50% discount off capital gains tax is awarded at the sale of a property. This could be a significant residual for the property owner to pick up at the sale.
All tied in together with this strategy are the deductible general expenses relating to the property such as advertising for tenants, council rates, insurance, gardening and lawn mowing, kilometres traveled to inspect the property etc. The rule of thumb is that any reasonable expense is applicable, subject to assessment by your accountant.
Conversely, once the income generated by the property becomes greater than the cost of interest and expenses, it becomes positively geared and thus becomes a source of passive income.