Foreword
“Negative gearing” is often said to be a powerful tool to help you accumulate wealth, which can save you thousands of dollars in taxes. In real estate investment, it is also one of the frequently misunderstood concepts.
The so-called “gearing” means nothing but borrowing. When you borrow money to invest, no matter whether the investment income is positive, negative, or zero, you are “gearing”, which means debt management. “Negative gearing” is of course that the cost of borrowing money is greater than the investment income you get from using the money, so in fact you are losing money.
In fact, the new Australian Taxation Bureau data shows that a record-high 1.3 million property owners are in a loss and are reporting negative gearing for their property investments, far exceeding 856,000 received on investment properties The number of balanced or profitable owners.
These figures paint a picture of the housing rental market. Real estate investors are getting older, nearly a quarter of investors are now over 60 years old, and the broader market segment is increasingly dependent on negative tax deductions. When this figure was released, Australian Tax Commissioner Chris Jordan warned that due to the large number of suspicious declarations of relief, real estate investors were included in the hit list by the Australian Taxation Office (ATO), and at the same time, negative tax deduction became a topic of intense federal elections.
In the latest batch of tax statistics, the Tax Bureau provided for the first time the detailed classification of real estate investors’ age and taxable income. Data from the Inland Revenue Department also shows that the gap between the number of individuals using negative tax deductions and the number of individuals not using it is widening.
Why do “lost money trading”
Many people have to do “negative gearing” such as “losing money” because of tax benefits. Because investment losses can be deducted from income. If the income is high, negative tax deductions, like pension contributions, are the only large tax avoidance methods that can be found.
Financial experts believe that when the unemployment rate is at its lowest value in three decades and wages have risen above the inflation rate, negative tax deduction is a very attractive method.
Under the current high interest rate, the cost of borrowing money has increased. Regardless of whether it is willing or unwilling, many people who invest in properties end up doing negative tax deductions. Because the cost of borrowing money is between 7% -8%, and the income of the property may be only 3%. This of course becomes negative.
For example, even if most of the properties are negative tax deductions (that is, the rental income is not enough to repay interest), they still enjoy the benefits of capital growth. The following example will explain in detail. In fact, owning property also includes other expenses, but the following simplified example will focus on paying interest.
Suppose you buy a property at A $ 440,000, the loan amount is A $ 400,000, and the interest rate is 7%, which means you need to pay A $ 28,000 in loan interest for one year. Assuming a rental income of 430 Australian dollars per week, that is, a year of 22,360 Australian dollars in rental income. Based on the above example, you have to pay AUD 28,000 in interest, but the rental income is only AUD 22,360, which means that the one-year difference is AUD 5,640, but the good news is that the value of the property will increase over time. If the value of the property increases by 10%, it means an increase AU $ 44,000.
After one year, you have to pay AUD 5,640 interest, and the value of the property has increased by AUD 44,000, which means that your assets are AUD 38,360 more than a year ago. If you add other deductible expenses, such as property management fees, maintenance expenses and depreciation, you can get more tax deductible. This will save you a lot of taxes. However, it should be noted that only the expenses that bring income are tax deductible. In other words, your property must be rented out, bringing you rental income.
risk
Negative tax deduction is a double-edged sword. While your income can be multiplied, your losses can also be multiplied, and you can easily lose money. Every investor knows that the price of what you invest in can rise, but it can also fall. If the price of the property you are investing in drops, then you may suffer a “disaster.”
Another risk is that the house you bought for rent has not been rented out for a period of time. Many people take it for granted that as long as they buy a house, they can use the rent to pay for the monthly payment. But the house cannot be rented out every moment, maybe you have to default on your payment.
Financial experts said that the investment method with negative tax deduction is suitable for those with high income and surplus funds. In this way, even if their property is not rented out for a while, it will not be in a stretched situation.
In addition, people who are more proactive in personality can also consider adopting this strategy. For example, when young people think that they can still work for 20 years, they can pay off their housing during this period, they may consider a strategy of negative tax deduction.
The people who earn more are, of course, those with high incomes who pay taxes at high tax rates, especially those with high incomes.
Wanjia believes that people who take negative tax deduction as a long-term strategy and can easily deal with it will eventually have a lot of benefits. But if you only focus on the short-term and want to make a fortune within one or two years, it is best not to use this method.
Some tips for using negative tax deductions
a. Assess your financial situation
First determine what you want to achieve. Don’t just blindly imitate because others have done so and succeeded. You must first make a careful assessment of your financial situation. Do n’t just because someone else has done this before you follow along, and you must seek expert advice.
b. Prepare for the worst
Before making a decision, carefully calculate your cash flow and see if your funds can sustain it in the worst case.
The
There are many young couples who have bought investment properties, and at this time both have work. Later, when there are children, the wife may not work, and the two incomes become one. As a result, the cash on hand becomes tight. At the same time, children also have to spend money, which makes the economic situation even more tense.
c. buy income insurance
There is also a very important factor to consider when investing in negative tax deductions, that is, while carrying out negative tax deduction operations, you must purchase income insurance. In this case, once something goes wrong with your income, the insurance money is your guarantee.
d. Fully understand the risks and benefits of negative tax deduction
No matter when you make any investment, you must understand both the benefits and risks, and be very sure that you are willing to take such risks in order to get such benefits. After you have fully evaluated the risks, you are no longer blindly investing. Your decision is made on the basis of fully grasping all aspects of information. You know which factors are not problematic, and at the same time understand what is likely to go wrong. If you are willing to bear the consequences when things are not going well, then you can “go ahead boldly”.
e. Choose a loan type that only pays interest when buying an investment house
If you already have a mortgage and want to borrow money to invest in the stock or property market, then you better borrow a loan that only pays interest. This is because this debt is tax deductible, and you do n’t have to repay the principal immediately.
The
Home loan is not tax deductible, so all your money should be used to repay the principal. You should first pay off your own home loan, and then convert your investment home loan into a variety that returns both principal and interest.
f. Purchase high-quality properties that will bring long-term capital gains
Before buying a house, be sure to judge the housing market cycle, so that you will not receive the “last stick”, and then you have to wait many years before housing prices rise back. Consider how likely it is to increase the value and how long you have to wait