Gearing and taxation

Borrowing money to invest, or gearing, gives you the flexibility to pursue investment opportunities, like property, and build your personal wealth. With an investment home loan, you can increase the amount you have to invest and you may also become eligible for a range of tax benefits on your investment.

Gearing can be a complicated investment strategy, so we recommend you talk to a financial planner for professional legal, financial and taxation advice before making any long-term commitment.

Make an informed decision

There are many advantages to taking out an investment home loan and investing in property. But there are also risks to consider before making a decision.

Find out more about investing in property.

Positive vs. negative gearing

Gearing can be a confusing concept, so here we’ll explain the difference between positive and negative gearing.

Positive gearing
Positive gearing occurs when the returns on your investment property are greater than the costs you’re paying, e.g. on loan repayments, interest and property maintenance. This can occur in market conditions where rents are high and interest rates are low.

Negative gearing
Negative gearing occurs when the income from your investment property is less than the cost of your investment home loan and maintaining the property. Benefits of negative gearing can include:

• The opportunity, in some cases, to offset losses incurred on your investment property against other forms of income as a tax deduction, reducing your taxable income.
• The potential to make long-term gains through capital appreciation, where the value of your property increases greater than the costs, leaving you with a profit.

Costs you can use to calculate this include bank fees, council rates, house and building insurance, strata costs, land tax, property management and depreciation. These will vary for each investment property, so speak to your accountant. The Australian Tax Office website is also useful for providing you with some details.

Risks
As a general rule, negative gearing is more risky than positive gearing, and should only be used where a long-term return is likely from capital gains.

While you can receive tax deductions with negative gearing, this is only because your investment is making a loss – and a loss is a loss. You need to ensure you’re in a position to cope if the value of your property falls or interest repayments rise.

Tax advice

While there are a variety of tax benefits available from your investment property, it’s important to understand what you can actually claim. The Australian Tax Office website provides a better understanding of what’s possible. You should also contact your accountant for legal, financial and taxation advice specific to your personal needs. Here are a few quick tips:

• Keep records to prove your deductions are legitimate, plus legal records of your ownership of the property for at least 5 years.
• Consider which expenses can be claimed immediately as deductions vs. those that can be claimed as depreciation over a number of years.
• You can only make claims for the times that your property is being rented out or available to be rented out. This is an important consideration if your property is a holiday home or unit and not just an investment property.
• Investment and personal borrowings need to be kept separate. For example, have one line of credit account for all your day-to-day personal expenses and another line of credit account for investment expenses or other investment opportunities such as share purchases. Both accounts can be secured against your investment property.

 

Building your wealth