In plain terms, negative gearing allows people to borrow money to purchase an income producing property, to claim a tax deduction for many expenses they incur running that income producing property ... including loan interest.

Tax rebates, along with your rental income are used to pay off your loan, with a minimum amount coming out of your own pocket.

The end result ... down the track, the tax man and your tenants will have paid most of your running costs for you and your property will have more than doubled in value, so you can now sell it and earn a tidy profit, or use this system to accumulate multiple properties to use the rental income as part of your retirement portfolio.

Negative gearing is the first step for most investors because, through the tax deductions offered, it is by far the most affordable, so it enables you to purchase multiple properties for a low up-front and ongoing cost.

Once your loan has reduced, and your property has increased in value, you'll start to experience neutral gearing. This process is greatly accelerated with mortgage reduction.

Then down the track your portfolio will be positively geared which is the ultimate goal for many investors, enabling you to retire on a very comfortable income ... much higher than you'd expect through superannuation.

Negative Gearing

Many Australians are property investors, a significant number of these investment properties are negatively geared - a tax strategy where investors make a net loss on their property which can be claimed against their other income to lower the amount of tax they pay.

Negative Gearing of investment property in Australia refers to a situation whereby the interest and the other costs incurred to acquire that property are more than the rental income received. This cash loss is offset against other sources of income, reducing the amount of income tax payable.

Put simply, Negative Gearing applies after you borrow to acquire an investment, and

1. The interest and other costs you incur are more than the rental income you receive from the investment (in other words you make a cash loss), and
2. This cash loss is offset against income from other sources, thus reducing your taxable income, and hence the amount of tax you have to pay (compared to the tax you'd pay without the investment).

Deduction checklist for investment properties

Below is a checklist of typical deductions directly related to rental properties that can be claimed:

Body Corporate Fees Borrowing Expenses (For example, stamp duty and legal fees on mortgage) Building depreciation (depending on date of construction) Cleaning Costs Council Rates Depreciation of fixtures and fittings (light fittings, carpets etc) Depreciation Schedule Insurance Costs Interest on loans (including interest prepaid up to 12 months in advance) and related bank charges

Land Tax Pest Control Costs Property Agent Management Fees Repairs and Maintenance (excluding improvements which are treated as capital and added to the cost base of the asset for capital gains tax purposes rather than being claimed as an immediate deduction) Telephone, postage and stationary Travelling Expenses Water Rates

The calculation of depreciable items is very specialised and should always be carried out by a qualified professional. Investors should always use an accountant who specialises in property investment to ensure all tax deductions are claimed. Further, ARPP recommends investors use the services of a Quantity Surveyor to ensure maximum deductions of their depreciable items.

When selecting your investment property, there are many factors to consider, one of them is new or existing. There is a major advantage with new property. That is, it allows you to maximise your tax advantages and to reduce the out of pocket costs to yourself to fund the property (see info pack for more details).

Can Negative Gearing Help Fund Your Retirement?

If negative gearing can produce high investment returns in a tax effective way, it stands to reason that it can serve as a very powerful instrument in building assets for retirement.

Craig Dangar, financial planning technical consultant for the institute of Chartered Accountants in Australia, points out that negative gearing has traditionally been a lucrative way to build returns through high capital growth. "Negative Gearing can be a viable tool in the accumulation phase provided the cash flow is there to sustain it," he says. Dangar notes that the success of negative gearing depends on the quality of the underlying assets.

Negative Gearing - Key Points

Invest in areas of good capital growth potential - An investment properties capital growth will more than make up for its short term cash loss, or future profits will be greater than present losses;

You are willing to accept wealth in the form of non-spendable capital gains (or future profits) in a short or medium term.

Non-taxed (or delayed tax) capital growth is a far more effective wealth-accumulation mechanism than income which is realised and taxed.

Negative Gearing is often sold as a tax minimisation tool, but really it should be considered an investment enhancement tool.

Arrange an appointment with AII to discuss how you can take advantage of Negative Gearing