Negative Gearing as a tool to minimize Taxation The tax department is the Robin Hood of the current century! It robs from the ignorant and gives to the well informed.
Tax laws are in a constant state of flux.
Sometimes loopholes open up and then they are closed.
It's the old story; if you build a better mousetrap the government will build a bigger mouse.
There is a myriad of tax laws and cases that are too numerous to be covered here.
The best investment in real estate is the fee you pay for expert counsel ling, and I do stress the word "expert" here as unfortunately more than half of the advice available is either ill-informed or biased.
The best way is to consult, at the very least, two (if not more) experts and then decide for yourself, with common sense as your criterion.
But, who do you consider to be an expert.
"Expert" is defined as "somebody with a great deal of knowledge about, or skill, training or experience in a particular field or activity.
" So obviously an expert is also someone who is successful in that field or activity and can prove their success.
Taking advice about real estate from someone who has been working in real estate since breakfast time or has no investment properties of his or her own is a recipe for disaster.
Here is a worthwhile quote to consider: "Most men believe that it would benefit them if they could get a little from those who HAVE more.
How much would it benefit them if they could learn a little from those who KNOW more.
" [WM, J.
H Boetcher] While some tax advantages result from loopholes, there are a few which are firmly established and even intended by the government, as a means of encouraging investment.
The most important taxation strategies for you to consider are negative gearing, capital gains, tax timing and income splitting.
I am going to comment briefly on each of these four key issues.
Negative Gearing A lot of mystique has grown up around the sacred cow of negative gearing.
So, let's put the record straight! A negatively geared investment is one that loses money.
Instead of you receiving an income, you have to put more money into the investment all the time.
Usually this is achieved by borrowing money against the investment, so that the interest payments on the loan exceed the income from the investment.
The loss is a tax deduction.
Here is an example: Income from rent per annum: $10,400 Interest on Mortgage: $15,000 Outgoings and Expenses: $ 3,400 TOTAL COSTS: $18,400 NET LOSS: $ 8,000 The difference is $8,000, which can then be deducted off any other income stream such as salary, wages or interest.
This reduces your tax liability and in some cases can change your personal tax rate.
Negative Gearing is essentially a way people with very high incomes can divert some of that income into a future time when their income may be lower, and convert income to capital gains (which may have a tax advantage.
) I think it is fair to stress that a positive cash flow is far better than negative gearing for the beginner.
Negative Gearing has been the undoing of many an investor.
The economic cycle swings down, their income dips and they can no longer meet the repayments, and then sadly they lose their properties.
I caution against Negative Gearing being your only motivation, because the main factor when buying real estate should always be whether it is a profitable investment.
If the answer is NO then I recommend you look very carefully at the person who is trying to convince you about the advantages of negative gearing, and you should also look at their own possible interests in trying to sell you the property.
You can only claim a tax deduction against an investment property, not on your personal residence.
Only people with too much money buy property to reduce tax.
Tax is not a good enough reason to purchase property unless you have a rather large income.
Most people would not fall into this category and as such you should chase cash flow first, capital gains second and any tax benefits third.
Naturally, there are exceptions to every rule, but the sure way of losing money is to concentrate on how much tax you are saving and not on how much profit you are making.
Taken to the outset, if you don't earn any income (money) you will not pay tax - so, don't work!! The other fact, which is bandied about by real estate agents, is that the more money you lose on a property, the less tax you pay! How crazy is that? Property investments may be compared to tuning a guitar.
Borrowing too much is like pulling a guitar string too tight - it might just snap! If it is too loose and there is no leverage involved then the sound is as poor as the investment returns.
When it is just right you can play any song and you call the tune.
The first few times it requires lots of concentration and with the help of a teacher you are gradually able to play the chords.
After further practice the whole song is pieced together and the teacher becomes redundant.
A worthwhile idea for you as a homeowner considering purchasing an investment property is to use the collateral in your current home.
With the money you raise, you can then claim the interest payable on the loan as a tax deduction.
This device is a beauty but should be used carefully and wisely.
Remember: Worrying is like a rocking chair - it keeps you occupied but takes you nowhere! This Article is an illustration of what could be achieved, when it comes to taxation and what can or cannot be done it is prudent and this author highly rec commends that the reader seeks their own advice from qualified professionals and not rely on illustrative articles
Tax laws are in a constant state of flux.
Sometimes loopholes open up and then they are closed.
It's the old story; if you build a better mousetrap the government will build a bigger mouse.
There is a myriad of tax laws and cases that are too numerous to be covered here.
The best investment in real estate is the fee you pay for expert counsel ling, and I do stress the word "expert" here as unfortunately more than half of the advice available is either ill-informed or biased.
The best way is to consult, at the very least, two (if not more) experts and then decide for yourself, with common sense as your criterion.
But, who do you consider to be an expert.
"Expert" is defined as "somebody with a great deal of knowledge about, or skill, training or experience in a particular field or activity.
" So obviously an expert is also someone who is successful in that field or activity and can prove their success.
Taking advice about real estate from someone who has been working in real estate since breakfast time or has no investment properties of his or her own is a recipe for disaster.
Here is a worthwhile quote to consider: "Most men believe that it would benefit them if they could get a little from those who HAVE more.
How much would it benefit them if they could learn a little from those who KNOW more.
" [WM, J.
H Boetcher] While some tax advantages result from loopholes, there are a few which are firmly established and even intended by the government, as a means of encouraging investment.
The most important taxation strategies for you to consider are negative gearing, capital gains, tax timing and income splitting.
I am going to comment briefly on each of these four key issues.
Negative Gearing A lot of mystique has grown up around the sacred cow of negative gearing.
So, let's put the record straight! A negatively geared investment is one that loses money.
Instead of you receiving an income, you have to put more money into the investment all the time.
Usually this is achieved by borrowing money against the investment, so that the interest payments on the loan exceed the income from the investment.
The loss is a tax deduction.
Here is an example: Income from rent per annum: $10,400 Interest on Mortgage: $15,000 Outgoings and Expenses: $ 3,400 TOTAL COSTS: $18,400 NET LOSS: $ 8,000 The difference is $8,000, which can then be deducted off any other income stream such as salary, wages or interest.
This reduces your tax liability and in some cases can change your personal tax rate.
Negative Gearing is essentially a way people with very high incomes can divert some of that income into a future time when their income may be lower, and convert income to capital gains (which may have a tax advantage.
) I think it is fair to stress that a positive cash flow is far better than negative gearing for the beginner.
Negative Gearing has been the undoing of many an investor.
The economic cycle swings down, their income dips and they can no longer meet the repayments, and then sadly they lose their properties.
I caution against Negative Gearing being your only motivation, because the main factor when buying real estate should always be whether it is a profitable investment.
If the answer is NO then I recommend you look very carefully at the person who is trying to convince you about the advantages of negative gearing, and you should also look at their own possible interests in trying to sell you the property.
You can only claim a tax deduction against an investment property, not on your personal residence.
Only people with too much money buy property to reduce tax.
Tax is not a good enough reason to purchase property unless you have a rather large income.
Most people would not fall into this category and as such you should chase cash flow first, capital gains second and any tax benefits third.
Naturally, there are exceptions to every rule, but the sure way of losing money is to concentrate on how much tax you are saving and not on how much profit you are making.
Taken to the outset, if you don't earn any income (money) you will not pay tax - so, don't work!! The other fact, which is bandied about by real estate agents, is that the more money you lose on a property, the less tax you pay! How crazy is that? Property investments may be compared to tuning a guitar.
Borrowing too much is like pulling a guitar string too tight - it might just snap! If it is too loose and there is no leverage involved then the sound is as poor as the investment returns.
When it is just right you can play any song and you call the tune.
The first few times it requires lots of concentration and with the help of a teacher you are gradually able to play the chords.
After further practice the whole song is pieced together and the teacher becomes redundant.
A worthwhile idea for you as a homeowner considering purchasing an investment property is to use the collateral in your current home.
With the money you raise, you can then claim the interest payable on the loan as a tax deduction.
This device is a beauty but should be used carefully and wisely.
Remember: Worrying is like a rocking chair - it keeps you occupied but takes you nowhere! This Article is an illustration of what could be achieved, when it comes to taxation and what can or cannot be done it is prudent and this author highly rec commends that the reader seeks their own advice from qualified professionals and not rely on illustrative articles