When it comes to Australian tax policy, negative gearing is an unavoidable topic. What makes it special is that Australia may be the only country that still uses this policy.
What is Negative Gearing
The official name is Negative Gearing. To be simple, if you suffer a loss in a business activity, then you can use the loss to offset your gains in other aspects, and finally, you can achieve the goal of reducing your taxable income and then reducing the tax.
In essence, the government or all taxpayers will help you bear part of the losses. The original target of this policy was not to mention the Negative Gearing for real estate investment, but all the items that can be negatively deducted from the tax can be called Negative Gearing, and it is only the most frequently used for real estate investment.
In a financial year, the negative taxable income that we call Negative Gearing is generated from the cash expenses for maintaining investment in property, such as bank loan interest, water bill, electricity bill, council rates, and non-cash expenses, such as depreciation of houses, and the gains exceeded the investment (rent).
What kind of fees related to the house property can be declared for refund
Advertising for tenants, that is, the advertisement fee produced while renting.
Body corporate fees
Land tax
Cleaning
Council rates
Depreciation expenses: In the property depreciation assessment report issued by professional appraisal agencies, the amount that can be declared each year can be determined according to Division 40 and 43 in this report.
Gardening and lawn mowing fees
Insurance
Interest on loans: If investment house is bought through a loan, the loan interest also can be declared for drawback.
Legal fees: Please note that the lawyers' fees incurred when buying and selling houses cannot be included in this item.
Pest control
Property agent fees: If the investment house is managed by the agents, the property agent fees can be refunded
If the house is partially damaged or needs to be maintained, the expenses incurred can be refunded.
The postage generated from the correspondence between the landlord and the housing management agency, as well as the telephone fee and stationery fee generated when contacting the rental matters, can be refunded.
Travel expenses are incurred while inspecting a house or collecting rent. For example, if the landlord himself is in Sydney or overseas and his investment house is in Melbourne, if he has to deal with the rental matters from Sydney or overseas to Melbourne, the transportation expenses incurred can be refunded.
If the landlord pays the water fee (water service fee, sewage system service fee, water service network service fee) for the leased house, please note that the water fee paid by the tenant cannot be included in the tax refund.
Sundry rental expenses can include a few miscellaneous expenses.
In fact, housing depreciation is often the most important negative gearing tool that is underestimated in real estate investment. Australian tax office (ATO) allows investors to declare part of depreciation of the real estate to offset the tax after the housing construction is completed. Because the amount of this part of the tax is only the written non-cash expenditure, you do not need to spend any cash and then get refunded, thus there is a say that "depreciation accounts of 40% of the real estate investment return".
For example, A's salary is AUD$80,000 per year. If he has Australian identity, he has to pay personal income tax of nearly AUD$20,000. But A bought an investment house whose rent was just enough to pay off the loan. However, depreciation of houses and others can bring him the means of negative gearing about AUD$ 25,000 a year. So the taxable portion for A is only $80,000 - $25,000 = AUD$55,000. Then the income of AUD$55,000 needs to pay the tax of AUD$10,000. That is to say, it can generate a positive cash flow of AUD$20,000 – AUD$10,000 per year.
What the house depreciation include
There are two categories:
Division 40，Plant and Equipment：
It usually refers to the mobile equipment and decoration parts in the room, such as carpet, home appliances, fire alarm, garbage cans, and curtains, etc.
Division 43，CapitalWorks Allowance：
It is the depreciation that points to structure of a building, namely the part that cannot move inside the building, such as the walls and tiles of the building, floors, and toilets, etc.
To be specific, after a house is built, all the items whose value will decrease with normal use because of the ages and the damages can be depreciated.
In particular, it should be noted that the common parts of the apartment, such as elevators and swimming pools, are also depreciable. However, the land of the independent house won't be destroyed, so it cannot be depreciated.
What is the amount of the depreciation
The detailed value and calculation method of housing depreciation vary from house to house. It is calculated by the real estate appraiser，and the independent houses about $600,000 can be depreciated by about $8,000 to $10,000 each year, while apartments depreciation is about $11,000 to $14,000.
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Because of the different usage limitations, the depreciation rates between the decoration parts of the building equipment and structural frame are different.
For example, the structural framework of a house can be depreciated by 2.5% a year for 40 years. And carpet will be depreciated with an annual 10% for 10 years. That is to say, the depreciation amount of the house in the first ten years is much greater than that in the ten years later.
That's one reason why most advisers recommend to invest in new homes rather than existing ones.
For the new house, the depreciation of the structural frame will be able to be depreciated at the rate of 2.5% per year for 40 years, and for the old house, according to the construction year of the house, it can only depreciate the rest of the part; And the assets of the equipment and decoration for the new house are brand-new, their depreciation start value is far higher than that of old houses, which also can get the utmost depreciation.
Financial tips of purchase by H Property Group
1 Many guests often regard depreciation as a "bonus" in real estate investment, but in fact, depreciation is an important "return". This tax rebate tool that doesn't require you to spend real money can have a direct impact on your cash flow and even your ability to make loans and payments. Be sure to take it as an important consideration when selecting the investment property.
2 The sooner you get an asset that provides you with constant positive cash flow, the further you can move towards the goal of wealth freedom. This is because once the assets and liabilities are fixed (the principal on your house is constant), all future capital appreciation will be yours. Therefore, the earlier depreciation is done and the earlier cash is held in hand, the earlier investors will have more funds to buy more investment products and create more returns.