Take advantage of negative gearing while your property makes a cashflow income.
Buying an investment property comes with a host of benefits, including rent and potential capital gains, a lower risk level than many other investments, and tax advantages such as those from negative gearing.
How does a investment loan fit into your negative gearing plans?
Because interest will make up the major share of costs for any property investor who owns an investment property, it’s a good goal to try to minimise the rate you pay. If you look at the example below, doing so could see you still retain the benefits of negative gearing while experiencing positive cash flow. Once you’ve read the scenario compare the loans on offer by the banks to see if you could make similar savings.
Case study – Daniels investment loan lesson
Daniel has purchased a property in Sydney.
The loan he’s taken out is a $400,000 interest only loan at a rate of 5.50%p.a., and the tenant who’s moved in pays him $400 a week in rent.
Below is his current annual situation:
• Rental income: $20,800
• Home loan repayments: $22,000
• Strata costs and other fees: $2,000
• Total cashflow = -$3,200
Depreciation allowance: $4000
= -$7200 negatively geared
As you can see, Daniel’s property is currently negatively geared and is a negative cashflow property.
If Daniel compared home loans and found himself one with a lower rate of 4.50%p.a, and continued interest only repayments, he’d still be negatively geared, but his property would be a positive cashflow property:
• Rental income: $20,800
• Home loan repayments: $18,000
• Strata costs and other fees: $2,000
• Total cashflow = +$800
Depreciation allowance: $4000
= -$3200 negatively geared
Daniel can reduce his assessable income by $3,200 as a result. However, he will still be ahead by $800 a year rather than being out of pocket by $3,200 before depreciation is even taken into account.
Daniel is at least $2,040 better off as a result of the reduction to home loan interest, as the $4,000 in additional interest in the first scenario provides a maximum tax benefit of $1,960 if Daniel is at the top tax rate of over $180k income (45% + Medicare 2% + budget repair levy 2%).
As always, the benefit of negative gearing is tied to your income, so remember to always consult your accountant before changing your investment strategy or related finance products, as your tax situation could change.