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Case Study - Negative Gearing

David is interested in investing in an apartment; he has done his background research and found a property he thinks best suits his investment strategy.

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Let’s look at the breakdown:

Table 1

Gold Coast Property
 2 Bedrooms, 2 Bathrooms, Unfurnished
Purchase Price
Deposit (20%)
Bank loan (80%)
Interest Rate
Rented permanently $470 per week 
Scenario based on 3% Vacancy rate $455 per week 

Table 2

 Income p.a. Expenses p.a.
Rental (3%Vacancy rate) $23,660 Body Corporate
    Council rates
    Management Fees
    Insurance $300
    Interest Bank
Income $23,660 Expenses -$36,145
Total Income/Loss   

Without negative gearing, David is looking at a loss of $12,485 per year on this investment. However, there are tax deductions David is eligible for:

Table 3

 Possible Tax Deductions
Building Depreciation The cost of a building is determined by a Quantity Surveyor Calculated over a period of 40 years, depreciated at 2.5% pa 
Fixture and Fitting Depreciation Deductions depreciated over the life of fixture or fitting (7 – 10 years) Including: hot water systems, carpets, ovens, air conditioners
Purchasing Costs Expenses from the purchase Including: bank fees, solicitor fees, lenders mortgage insurance
Expenses Ongoing costs for the property Including: maintenance and repair costs, council fees, water, insurance, interest on the loan, body corporate fees

Table 4

Davids Allowable Deductions (PA)
Building Depreciation (approximately)
Fixtures/Fittings Depreciation (approximately)
Travel Expenses
Accountant $500
Total Allowable Deductions

If David is on a wage of $100,000 per year, the benefit of offsetting deductions means that David’s tax bracket has changed:

Table 5

 Income Expenses
Personal Income
 $100,000 Expenses
Rental Income  $23,660
Deductions $16,500
Total Taxable Income $123,660 Total Allowable Deductions  -$52,645
New Taxable Income

Table 6

New Taxable Income
New Taxable Income
Tax applicable on PAYE $100,000
Tax applicable on PAYE $71,015
Possible tax refund

If we take David’s total loss on this property (−$12,485) and add the potential tax refund of $10,095, he is now operating on a loss (holding cost) of −$2,390 per annum. However, as the property’s rent increases over time, this shortfall will decrease and the property should eventually become positively geared. If David has chosen wisely, he should also reap the benefits in the long-term when he sells the property.

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