Guest Blogger: Craig Ball from PRECISION BUSINESS ADVISORY
Creating wealth through purchasing an investment property is a well-established practice in Australia.
By definition, ‘negative gearing and property’ is where you borrow to acquire the property and the interest expense on the loan exceeds the rental income you receive from the tenant.
The Benefits
The attraction of borrowing or gearing to invest is that you can purchase a property that might otherwise have been unaffordable. The strategy can also be tax effective because individuals can offset the tax loss against other assessable income.
The real benefits of negative gearing are only realised when you combine the correct tax and financial advice with a suitable property in the right location funded by the most appropriate loan product. As such, you should always seek expert advice and make sure the purchase is within your budget and will deliver long-term financial benefits supported by taxation concessions.
The Risks
If you were to believe some people, it would all seem very simple. You buy the right property in the right location and then have the tenant and the Tax Office partially fund your tax loss while you sit back and profit from the appreciating property. The truth is, while gearing can amplify your gains, it can also magnify your losses.
If you negatively gear property, you need to understand some important points:
- Firstly, investing in property requires planning and the tax benefits should not be the only reason for the property purchase.
- Negative gearing is not suitable for all investors because it implies a negative cash flow that you will need to fund from other income sources. The income tax and capital gain tax implications will depend on factors such as the ownership structure, your marginal tax rate and the holding period.
- While the family home is a purchase from the heart, an investment property needs to be a purchased from the head. It is an investment decision that requires planning and research.
- Properties generally only create profits through capital gains that accumulate over a medium to long term period. They are illiquid assets, which can’t be sold overnight which could pose problems should your circumstances change.
The Importance of Getting the Right Loan and Loan Structure
Obtaining the right loan can nearly be as important as finding the right property. There are numerous loan options including interest only, principal and interest, fixed and variable. Finance needs to be planned to suit your ultimate investment goal and you need to be wary of fees, interest rates and ‘gimmick’s used by lenders to win your business. Get it wrong and the costs of rearranging loans with ‘deferred establishment fees’ can waste thousands of dollars.
One of the most important decisions you need to make when purchasing an investment property is which entity or person should own the property. We liaise with Mortgage Corp loan specialists and recommend the appropriate structure so you maximize the tax savings and protect your investment. There are a number of key factors to consider because transferring the property at a later date can prove costly with stamp duty and capital gains tax implications.
The Service PRECISION BUSINESS ADVISORY Provides
We can also help you with
- Calculate the weekly after tax cost of owning an investment property
- Prepare the annual Profit and Loss schedule for your Income Tax Return
- Through our affiliation with a buyer’s advocate we can help you locate the right property in the right location with a view to maximizing the capital gain on sale
- Through our affiliation with a buyer’s advocate we can help you locate the right property in the right location with a view to maximizing the capital gain on sale
- Where applicable, prepare an annual PAYG Variation to bring forward the annual tax benefit of the loss into your regular pay packet to help with your cash flow
- Assist with creating and maintaining a Capital Gains Tax register of costs
- Provide ongoing advice regarding the tax deductibility of expenditure
- Calculate the Capital Gain on sale of the property
- Provide a referral to a suitable insurance broker, solicitor, etc.
- Provide advice regarding record keeping requirements
About Mortgage Corp
Based in Mount Waverley, Melbourne, Mortgage Corp specialises in helping successful professionals and property investors access discounted premium rates, minimise loan approval red tape and apply strategic loan structuring for long-term investment success.
Unlike many mortgage brokers that may be able to help you with general loans but simply don’t have the skills, experience or resources to genuinely help property investors maximise long-term wealth, Mortgage Corp loan specialists help investors develop a strategic approach to property investing for long term investment success. Request a Free Loan Structuring Strategy Session with our 5 Star Lending Specialist Neil Carstairs today!
About Neil Carstairs
Neil is the founder of Mortgage Corp, an active property investor and awarding winning MFAA credited finance broker with more than 10 years mortgage broking experience. Currently, Neil is one of only 19 MFAA Certified Mentors in VIC/TAS region.
He is known for his strategic approach to investing and ability to reach fast, successful outcomes for clients where his industry peers could not.
