What is AustralianNegative Gearing Investment?
Buying a house or an apartment for subsequent leaseis quite popular kind of investment in Australia. The State encourages such investment of money in the form of tax cuts.
A common term that it uses: Negative gearing. It can be called process of losing money on the investment, which arepartially reimbursed in the form of a tax refund. Losing money does not sound very good, but a good description of what is happening.
The cost of housing is quite high, if you buy a real estate loan or lease, the rent does not cover all the costs of buying and maintaining a house (apartment).
The question that immediately arises: why do you need such an investment, which leads to loss of money? Excellent question.
Quite profitable
The answer is simple. Over the last 40 years, the cost of real estate has risen steadily, with an average doubling every ten years. For example, the average cost of a home in Queensland during 1995-2002 was 160 thousand dollars, in 2005 it was up to $ 315,000.
Those who buy the property count just on that. After holding the house for several years they just sell it. The benefits of price growth usuallycover the losses of previous years.
The investment property is bought on credit in most cases. A person usesfor example $ 10,000, the remaining $ 305,000 take from the bank. Hoping that if real estate will rise in price twice, he will have to return $ 305,000 and the value of home will be doubled (for example up to $ 620 thousand) - invested personal money ($ 10 thousand) havegenerated a $ 300 thousand. Thus, the credit is a tool that helps to produce significantly greater return than may be obtained in any other case.
Purchase of housing loans has been one of the most popular types of investment in Australia. People buy house or apartment, held for several years and earn thousands of dollars. These are ordinary people on the payroll, and it is difficult to imagine other way, they could earn that kind of money. Another important thing is that foreigners are not deprived of the investment opportunity. Furthermore,they have a chance to obtain special Investor Visa and get additional perks.
Negative gearing: how it works.
Simpledescriptionof the process by an example.
Alex and Kate bought their own home in which they live 15 years ago. Alex earns $ 50,000 a year, Kate $ 10,000 a year. Credit for the house was mainly paid for these years. They can easily borrow money to buy investment property. They decided to buy an apartment and rent it.
They found an apartment, which costs $ 285 000. We found that it is possible to rent it for $ 280 for a week. They decided to buy it.
The price of an apartment is $ 285,000, but it is not all the money they need to pay. Because stamp duties, fees for registration and registration of the apartment must be added to the price.
Approximately the cost of buying:
- Purchase stamp duty $ 8450
- Government fees $ 499
- Conveyance and searches $ 1500
- Loan application $ 700
- Loan stamp duty $ 1040
- Total costs for the purchase: $ 297.189
They don’t have that kind of money and they go to the bank for a loan. The Bank agrees to issue a credit for the full amount of purchase. Supposable a percentage of the loan is 7.75%.
In this case, profits and losses will be:
- Rent $ 14,000 (280 * 50) 50 is the number of weeks of the year, when the apartment is rented;
- Property running deductions:
Council rates $ 600; Body corporate $ 1,100; Repairs (current repair) $ 500; Property management fees $ 980; Travel expenses to inspect a property or collect a rent $ 150; Insurance $ 432; Pest control $ 120; Stationery, telephone and postage $ 20.
Then there is such a tricky flow, which allows to increase spending virtually - called Depreciation.
It's such a rate that takes into account that over time the apartment was decaying and reduces its cost. This flow exists only on paper at the tax accountant. The size of the write-off is determined by the cost of building the apartment. For example:
- Capital works 2.5% building write off = $ 5,000
Depreciation value of fittings and fixtures = $ 2,000. Under the fixtures and fittings is meant a set of items and accessories that are written off (reduce the taxable profit or increase the loss) for several years. For example oven, air conditioning, carpeting, etc.
For example their cost will be $ 10,000, a decrease in the value of 20% is $ 2,000;
- Total paper write-offs - $ 7,000
- Loan deductions: $ 348
- Bank interest $23.613
- Total expenses- $ 34.863
- Total loss of $ 20.863 ($ 401 per week).
In this example, there are several conditions:
1. The apartment was relatively new, that is why there was such a high write-offs on the fixtures and fittings, every year this figure will be reducing.
2. The term - special building writes off and the amount of write-off is determined based on the estimated cost of building a house or on the basis of a report, prepared by quantity surveyor. In this report are included: built-in kitchen, built-in cabinets, doors, etc.
3. House is bought in the name of the person who earns more, pays more taxes, so more tax can be returned.
Before buying a property he earned $ 50,000 per year, minus $ 11,100 tax , so he received $ 38,900.
After buying the property:
- Salary: $ 50,000
- Rental income $ 14,000
- Total revenue of $ 64, 000
Minus expenses:
- The loss from rent: $ 34.863 (out of a non cash deductions $ 7,000, cash deductions $ 27,863)
- Total revenue of $ 29.137
- Income tax: $ 4,091
He received per year: $ 50.000 + $ 14,000- $ 4,091- $ 27.863 = $ 32.046
Before buying a property he received $ 38,900, and after the purchase - $ 32.046, that is $ 6,854 less. The whole operation with the purchase cost him $ 131 a week.
How it is possible?
His taxable income reduced. And as the amount of his income reduced, his taxes reduced by $ 6.909 per year.
The Australian Government supports investors by deliberately reducing their taxes.
In the history of Australia was a period when negative gearing was abolished, taxes were not refundable and investors began to dump investment property. Property prices fell and rental prices rose significantly increasing the queue for public housing and the amount that the state was paying to low-income families (rent help).
In this scheme of investment are important two things: the high rate of tax of the person in whose name the property is purchased and the date of construction of the house.
As you can see Australian Government welcomes investment and especially welcomes foreign investments. It is great opportunity for those who want to increase their money without any complicated schemes.
