3 quick steps to calculate negative gearing on your property
Have you bought an investment property?
Or maybe you are considering buying an investment property?
One of the main questions you may have about it is: will it be a negatively geared property or will it be positively geared?
We are aware that negative gearing is popular in Australia among residential property investors.
That’s why we’re going to help you to calculate the negative gearing loss on your property.
Firstly, let’s check in so everyone understands what negative gearing means, then we’ll go through the three steps to calculate the negative gearing on your property investment.
- What is negative gearing?
- 3 steps to calculate your negative gearing loss
- Ways to use this negative gearing calculator
What is negative gearing?
Negative gearing occurs when an investment property’s tax-deductible expenses involved in renting it out are more than the rental income you earn from it in a given financial year.
In short, you have made a loss.
Tax law allows you to claim a deduction for this shortfall (or loss) in your tax return against your other taxable income such as salary, wages or other income.
This can effectively reduce your overall personal income tax bill – and result in a refund!
This refund can also help with the cash flow of your property.
Even if you find yourself in a situation where your other taxable income is not enough to absorb the loss, you can carry forward your loss to the next financial year.
There are some restrictions on the amount of tax deductions, so it’s wise to check with your accountant.
This leads us to the question, how do you work out your negative gearing loss?
So glad you asked, haha!
Just follow the quick steps below and you’re on your way.
Calculating the negative gearing loss on your investment property
The formula to calculate negative gearing is:
Income (Total rental income) – tax deductions (property expenses plus less depreciation)
= the amount of loss from the investment property.
Say, for example, the rental income you receive is $500 per week, so the total annual rent will be $26,000 ($500 x 52 weeks).
Say the property expenses totalled $20,000.
And that your depreciation for the rental property was $9,500, for example.
$26,000 – ($20,000 + $ 9,500) = -$3,500.
Your negative gearing loss was $3,500.
Your expenses and depreciation for your rental property were $3,500 greater than the rental income you received.
You will then deduct the loss of $3500 from your other income in your tax return.
We’ll go into more detail now, so you know exactly how to calculate each step for your negatively geared investment property.
3 steps to calculate your negative gearing loss
Step 1. Total your property income
Add up all the rental income collected over the financial year (if you are doing a rough calculation, you can simply multiply the weekly rent received by 52).
Step 2. Deduct the total of all your property expenses.
These immediate tax deductions are the expenses you need to spend to maintain the property, repairs caused by wear and tear and the administrative costs of managing the property such as mortgage interest repayments.
An immediate tax deduction includes such expenses as –
- Accountant and bookkeeping fees – all valid expenses when it comes to managing your investment property and can be claimed immediately. This may include tax advice.
- Property maintenance such as plumbing or electrical issues, repairs to and maintenance of the property.
- Utilities – if you are the one paying the utility bills, you are entitled to claim them. If the tenant pays them, you are not able to claim them.
- Cleaning – any cleaning fees you incur whether this is a weekly cleaning service to maintain the property for regular guests or end-of-lease exit cleaning between tenants.
- Gardening costs – if your property has a garden and yard the cost to maintain these areas can be an immediate deduction.
- Mortgage interest charges on your loan and bank charges – interest repayments on loans that you have over the property (or the portion if you rent out a part of the property) as well, as any bank charges relating to your investment property. (Take note that only the component of interest in your loan repayments is deductible.)
- Council and body corporate fees – again if you pay these fees, you are entitled to claim them.
- Property management fees – for example, the fees charged by your agent to manage your rental property or any admin charges.
- Advertising and marketing fees to find a tenant for your property.
- Legal fees – you may need a solicitor to help draw up the lease contract or assist with an eviction notice. But you cannot claim the solicitor fees to purchase the property.
- Property Insurance – any insurance related to the property including fire, flood, contents, or landlord insurance.
- Pest control – to protect your property and investment as an income-producing entity.
- Land tax – this is a yearly tax on the value of your land. This is an immediate deduction however, you do need to check as each State and Territory have their own regulations when it comes to claiming land tax on an investment property.
- Phone, office supplies, and internet costs – you need these facilities to maintain your investment property. However, you can only claim the portion that relates to maintaining and managing your investment property.
Step 3. Deduct the total depreciation
Depreciation is the loss from the decrease of the building and certain assets within the property.
Some of the depreciation costs you can claim on your investment property include –
- Building depreciation costs
If the building of your rental property is no older than 40 years, you can claim the depreciation of the building, at 2.5% per annum.
An example here may help explain this.
Say it costs you $500,000 to build a house as a rental property. In the first year of your ownership, you can claim 2.5% of $500,000. That’s a total of $12,500 as a depreciative expense.
In fact, you can claim $12,500 for every year of your ownership until the house reaches 40 years.
- Capital Works Deductions
Any construction or renovation costs are tax-deductible on your rental property.
These expenses can only be depreciated over several years. They cannot be fully claimed in the year you paid for them, unlike your maintenance costs.
Same as the building depreciation costs, you can generally claim 2.5% of the total cost of the construction or renovation for up to 40 years.
- Plant and Equipment Depreciation
Some items in your investment property can wear and tear over time and the depreciation accounts for this financial loss every year.
These are items over the value of $300, that are removable, are not considered to be permanently attached to the property and replacement is likely to occur in a short period of time.
Some examples of plant and equipment depreciation items include carpet, light and window fittings, showers, air conditioning units, hot water systems, white goods (stovetops and ovens), heat pumps, floating timber flooring, cupboards and furniture.
You must have purchased these assets new (not second-hand or as used assets) and no one else was previously entitled to a deduction for the decline in value of the depreciating asset.
You can depreciate the asset if it was installed for use or used at this property, and you acquired the property within 6 months of it being newly built or substantially renovated.
A good accountant will set up a depreciation schedule for your investment property to make it easier to deduct your depreciation every year.
Ways to use this negative gearing calculator
For new property investors considering buying an investment property
Quickly use this formula for your geared property – it helps you estimate the income (rent), expenses (interest components of loan repayments, management fees etc), and depreciation of the property.
For property investors
If you are completing your annual tax return, you can follow it to get together the figures for your accountant.
If you are needing more help with the negative gearing calculator or what to include in each of the steps, call our accounting team for assistance.
We don’t want you to miss any tax benefits, as this is money in your pocket! Our team can be reached on +61 2 9100 0480 or book an appointment at your convenience here.