Issues of Negative Gearing and Depreciation Claims

negative gearingInvestors love the idea of capital growth. This said they are not averse to the concept of high rental yield either. In fact, things boil down to how a particular investor is planning his portfolio. Negative and positive gearing both have their merit after all? I will be none the poorer by elaborating on this subject….hasn’t gearing caught public attention for a long while?

Gaining from negatively geared properties

One of my clients asked me how negative gearing can be a wise idea if it is based on losing money. I think this whole discussion has to do with what your perspective of monetary loss or gain is and are you ready to compromise your short-term gains for a smart haul over a longer period.

Tax deductions

When you negatively gear a property, you make it easier for the property to gain from tax deductions. Yes, you lose out on generating a positive cash flow (your mortgage liabilities surpass rental returns) but this you can ever-so-easily offset with capital growth registered by the property.

Why does negative gearing work in Australia?

Looked from a different perspective, negative gearing is a way of building wealth, taking the aid of the tax department, which funds your wealth accumulation.  Just as I was done with explaining this bit to my client, he flung another well-meant query at me “and Tracey, why do you think Negative Gearing works in Australia?”

I think this question needs to be answered in the light of housing affordability. Tax deductions applicable for negatively geared properties have made it possible for small fries to dream about real estate investments. It has well and truly opened the property market to a majority.

Depreciation claims

While I talk about gearing-specific tax deductions, it will be only be befitting to shed some light on other deductions and depreciation claims. Depreciation is read for two different types of assets- buildings and fittings/fixtures.

Building values witness an annual reduction in costs for a period up to 40 years. On the other hand, a fixture’s or a fitting’s entire lifespan is taken into account while making depreciation based adjustments.

Repair costs

You will do well to research immaculately on cost of repairs too. If you incur repair costs in close proximity to the time of property purchase, it will be treated as part of the cost base and hence won’t be tax deductible.

Also significant is the knowledge that chief repairs, pertaining to floors or walls, are also treated as part of the cost base and cannot be claimed under repairs.

I just shared a few ideas so that you know just how much there is to know before you fall hook, line, and sinker for the great investment dream.

On which side of the fence are you on the Gearing debate?