What is negative gearing and property depreciation for an investment property
What is negative gearing & property depreciation for an investment property?
If you own an investment property and have lodged a tax return then you’ve likely already experienced the benefits of negative gearing on your property. Negative gearing may have resulted from financial costs to keep the property or from depreciation on the property. Either way, the cost to own an investment property will offset your taxable income if negatively geared.
Currently, the Australian Government is going into an election (May 18th 2019) and there could be big change to negative gearing. There has already been big change with depreciation, and if there is a change to negative gearing it could impact the property market further resulting in less benefits for investors. Personally we hope there is no change as property has been a great asset class to build wealth over time.
What is negative gearing?
When you add up all the income received from the investment property, then deduct all the expenses to maintain the property, if the final number results in a loss you have a negatively geared property. For example: you receive $10,000 p.a. rental income; it costs $15,000 p.a. for loan interest, council rates, property management and repairs = - $5,000 (loss).
Expenses on your investment property may include, but are not limited to:
- Interest repayments
- Land tax, strata fees and council rates
- Repairs and maintenance – such as pest control, gardening, plumbing, etc.
- Building depreciation
- Building and landlord insurance
- Property management fees
What is property depreciation?
Depreciation is the decline in value of the property over time, for which can be claimed as a loss. Since the change in legislation came into effect (circa 2017), you can no longer claim on the property finishings if they were not installed by you (i.e. new build), however the building and other property features may be claimed.
How do I get a depreciation report?
A qualified quantity surveyor needs to complete a depreciation report for you if you have purchased an investment property. It is helpful to know the year the property was built, provide information about the property you have purchased (i.e. new build or existing) so you can ask the qualified quantity surveyor if the depreciation schedule is going to be worthwhile and to understand what can and cannot be claimed.
Is negative gearing better than a positive cash flow property?
This is an age old argument and depending on your circumstances, there may be one strategy which works better for you than another, however there are a few simple questions to ask yourself and more importantly, this is a conversation you should have with your accountant to understand the tax implications / benefits of either strategy.
- Is your income high, resulting in large tax payments which could be reduced from a negatively geared property?
- Is your income lower and additional cash flow would assist your circumstances?
- Is capital growth of the property going to provide greater returns over time than extra cash in your pocket?
- What is your overall property investing strategy?
Your accountant can most certainly assist with determining the tax implications / benefits of an investment property and a financial planner can assist with your overall wealth planning strategy, so it’s beneficial to be speaking with both professionals.
A buyers agent is another good resource for having these conversations. Some buyers agents will support high returns (capital growth) whilst others can assist with lower cost investments to help build a property portfolio.
If you are not sure who to speak with about your tax planning, financial planning or a buyers agent, contact us and we will connect you with a trusted partner who can assist.