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Negative Gearing a Legitimate Tax Lowering Tool
Negative Gearing as a tool to reduce taxation
The tax department is the Robin Hood of this century! He steals from the ignorant and gives to the knowledgeable. Tax legislation is constantly changing. Sometimes gaps open and then close. It’s an old story; if you build a better mousetrap, the government will build a bigger mouse. There are countless tax laws and cases that are too numerous to cover here.
The best investment in real estate is the fee you pay for professional advice, and I emphasize the word “professional” here, because unfortunately more than half of the advice available is ill-informed or biased. It’s best to consult at least two (if not more) experts and then make your own decision, using common sense as your yardstick.
But who do you have as an expert? “Expert” is defined as “someone with extensive knowledge of or skill, training or experience in a particular field or activity.” Obviously, an expert is also someone who is successful in this field or activity and can prove his success. Taking real estate advice from someone who has been in real estate since breakfast or has no investment properties of their own is a recipe for disaster.
Here is a worthy quote to consider:
“Most men believe they would benefit if they could get something from those who HAVE more. How much they would benefit if they could learn a little from those who know more.” [WM, J.H Boetcher]
While some tax incentives are due to loopholes, some are firmly established and the government even intends to use them as a means of encouraging investment. The most important taxation strategies to consider are negative rates, capital gains, tax timing and income splitting. I will briefly comment on each of these four key issues.
A lot of mystique has grown up around the sacred cow of negative gearing. So, let’s clear it up! A negative oriented investment is one that loses money. Instead of receiving income, you have to keep putting more money into the investment. This is usually achieved by borrowing money against an investment so that the interest payments on the loan exceed the income from the investment. The loss is a tax deduction. Here is an example:
Rental income per year: $10,400
Mortgage interest: $15,000
Expenses and expenses: 3400 dollars
TOTAL COSTS: 18,400 dollars
NET LOSS: 8000 dollars
The difference is $8,000, which can then be deducted from any other income stream, such as salary, wages or interest. This reduces your tax liability and in some cases can change your personal tax rate. Negative gearing is basically a way for people with very high incomes to shift some of that income to a future when their income may be lower and convert the income into capital gains (which can have a tax advantage).
I think it’s fair to point out that positive cash flow is much better than negative gearing for a startup. Negative Gearing has been the bane of many investors. The economic cycle swings down, their income drops and they can no longer make repayments, and then unfortunately they lose their properties.
I warn you that Negative Gearing is not your only motivation, because the main factor when buying real estate should always be whether it is a profitable investment. If the answer is NO, I recommend that you look very closely at the person who is trying to convince you of the benefits of negative gearing, and also look at their own possible interests in trying to sell the property.
You can only claim tax relief for investment property, not for your personal residence. Only people with too much money buy real estate to reduce tax. Tax is not a good enough reason to buy property unless you have a pretty high income. Most people would not fall into this category, so you should chase cash flow first, capital gains second, and potential tax benefits third. Of course, there are exceptions to every rule, but a sure way to lose money is to focus on how much tax you’re saving rather than how much profit you’re making.
In the beginning if you don’t earn any income (money) you won’t pay tax – so don’t work!! Another fact that real estate agents tout is that the more money you lose on a property, the less tax you pay! How crazy is that?
Investing in real estate can be compared to tuning a guitar. Borrowing too much is like stretching a guitar string too hard – it just might break! If it’s too loose and there’s no leverage involved, the sound is as bad as the return on investment. When it’s just right, you can play any song and dial the melody. It requires a lot of concentration the first few times and with the help of a teacher you can gradually play the chords. After further practice, the entire poem is composed and the teacher becomes redundant.
A helpful idea for you as a homeowner considering buying an investment property is to use the insurance on your current home. You can then claim the interest on the loan as a tax deduction with the money you raise. This device is wonderful, but it must be used carefully and wisely.
Do not forget: Worry is like a rocking chair – it keeps you busy but doesn’t get you anywhere!
This article is an illustration of what could be achieved when it comes to taxation and what can or cannot be done is prudent and this author strongly recommends that the reader seek their own advice from qualified professionals and not rely on illustrative articles
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