Postive cash flow and negative gearing question

[Younginvester]

Hi,

Had a bit of a search but couldnt locate a specific answer.

All new to the investment game so got a few questions about the tax advatages etc.

I understand that when the incoming rent does not match your interst and other property costs then you are at a lose and allowed to claim this as a deduction.

However, what happens when your incoming rent exceeds your property costs. Does this mean you must pay tax on the difference between your incoming and costs? Is this what ppl call postive cash flow?

Can one situation be better than the other for varying situations?

Thanks in advance

Younginvestor

 

[Peter_Tersteeg]

Firstly, don't get hung up on the tax advantages. The reason you should invest is becuase it'll make you money in some way, not becuase you'll pay less tax.

Having said that, tax advantages are a nice bonus.

Essentially, all of the costs associated with owning an investment property at tax deductable. All of the income or captial gains is taxable. One can offset the other. It's the same as work related expenses are tax deductable, but your salary is taxed.

The basic version is you take the income from rent and subtract the expenses (loan interest, rates, body corporate, etc).

If the result is a positive figure, you add this to your normal income. As you've now earnt more than what you've paid you PAYG tax on, you'll owe the ATO some money (essentially on the rental profit for the year). You're paying tax on a profit.

If the result is a negative figure, you subtract it from your income. Your income has lowered, but you've paid PAYG tax for a higher amount, so you get a tax refund. You're getting a tax refund on a loss.

Keep in mind, you only get a refund on the taxable rate based on your total income. If you're currently paying 30% tax on your income (earing less than $80k, the extra tax you pay will likely be 30% of the profit. If you made a loss, the refund will be 30% of that loss (some people seem to think it'll be 100% of the loss).

In the situation of negative gearing, you're actually loosing money and the ATO refunds a percentage of that loss back to you. Dispite this, you're still loosing money. The expectation of a negative geared property is that it will go up in value, which over the long term will out perform the losses.

If you're positive geared, you're making a profit which you pay some tax on. You're still making a profit and it's still putting money in your pocket. You're not as reliant on the property increasing in value, but I imagine it's still the expectation of most investors.

 

[Rob G.]

Short answer:

Cash in = rent (assessable)

Cash out = rates, etc. (deductible)

Non-cash expense = depreciation (deductible)

Answer: Deductions often exceed cash outlay

Cheers,

Rob

 

[jweg]

Taxing Times

Another Question... Traditionally I have had a fairly strong income (therefore being negatively geared was quite helpful)... Now different situation... I don't think I'll be paying enough tax to effectively make use of my deductions.

So my question... If I am negatively geared to the point where I have a NIL tax bill... can any further losses (negative gearing) be carried over to future years or added to the cost base of the property for CGT purposes ???

Advice woudl be much appreciated.

 

[chilliblue]

It might be time to visit your accountant.

 

[jweg]

Accountants

Thank you, most informative... Actually was rather hoping someone may have had similar experience to my own Thanks though

 

[Peter_Tersteeg]

Deductions can be added to the cost base when you sell, but I don't know if you can defer lossess or do that if you still earn some income (even a small one).

I suspect the answer isn't a black and white one. You really do need to get proper advice.

 

[Younginvester]

Thanks guys gives me a bit of background which is all i was after. Seeing my accountant shortly

Cheers

 

[Aaron_C]

I think if you make a loss (i.e. negative income) in any year (due to excessive negative gearing) you can carry that loss forward as a tax write-off against future years' income. But as people have said, speak to an accountant about that one.

 

[MIW]

Cash Flow vs Capital Growth - What's the stategy for you?

Hi,

Had a bit of a search but couldnt locate a specific answer.

All new to the investment game so got a few questions about the tax advatages etc.

I understand that when the incoming rent does not match your interst and other property costs then you are at a lose and allowed to claim this as a deduction.

However, what happens when your incoming rent exceeds your property costs. Does this mean you must pay tax on the difference between your incoming and costs? Is this what ppl call postive cash flow?

Can one situation be better than the other for varying situations?

Thanks in advance

Younginvestor

You should buy a copy of 'Australian Property Investor' March 2012 and read page 23 example (case stude taken from 'The Property Puzzle' by Stuart Wemyss). It compares positive cash flow startegy vs capital growth startegy.
It all depends on your long term view and your goal of what you wish to achieve. Please read it, it will answer so many questions and perhaps it will help you to decide your approach for the future, especially being young investor....Good Luck!
I know I am a capital growth strategy investor since I plan to be in the for the long haul.....