You are here > Investment Tips>Investment Strategies>Case Study - Negative Gearing

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.

Bookmark and Share

Let’s look at the breakdown:

Table 1

Gold Coast Property
 2 Bedrooms, 2 Bathrooms, Unfurnished
Purchase Price
$440,000
Deposit (20%)
$88,000
Bank loan (80%)
$352,000
Interest Rate
7.3%
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
$5,700
    Council rates
$2,600
    Management Fees
$1,849
    Insurance $300
    Interest Bank
$25,696
Income $23,660 Expenses -$36,145
Total Income/Loss   
 -$12,485


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)
$9,000
Fixtures/Fittings Depreciation (approximately)
 $6,000
Travel Expenses
$1,000
Accountant $500
Total Allowable Deductions
 -$16,500

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
 $36,145
Rental Income  $23,660
Deductions $16,500
Total Taxable Income $123,660 Total Allowable Deductions  -$52,645
New Taxable Income
 +$71,015

Table 6

New Taxable Income
New Taxable Income
$71,015
Tax applicable on PAYE $100,000
$24,950
Tax applicable on PAYE $71,015
 $14,855
Possible tax refund
 $10,095

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.



DISCLAIMER: Whilst the publisher and author believe that the information contained in the publication is based on reliable and researched information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Anyone who intends to use the information as the basis for making financial or business decisions should first obtain advice from a qualified professional person. This article is published on the understanding that neither the publisher nor the author — is responsible for the results of any action taken on the basis of the information published; and is not engaged in rendering legal, accounting, professional or other advice or services. The publisher and author expressly disclaim all liability and responsibility to any reader of this publication as a consequence of anything done, or not done, by a reader relying upon any part of this publication. ©This article may not be reproduced in full or in part without the specific written consent of Which Property and the Author. back to top
Location

Bedrooms
Min Price
Max Price
 

First Home Owners Grant
Ends December 2017


Sign up to our property news!

Captcha Image