Exposure of Negative Gearing Traps

For many years now, the idea of negative gearing has turned out to become a professional service in many firms, leading to the necessity to identify several common areas where these who invest in properties usually trip up, as well as laying claims on loan interest.

Exposure of Negative Gearing Traps

Many people in this country invest in properties that are negatively geared. Almost 25% of all the 9 million residential properties in Australia are rented from private landlords, according to the Australian Bureau of Statistics. Only 8% of all the 1,811,174 individuals, representing about 23% of the entire population, have an investment in properties in the country if the information coming from the Australian Tax Office is anything to go by.

The issue of taxation has led to the loss on investment in two out of three property investors in Australia, a figure which represents 1,213,595 of the entire Australian population, according to the Australian Tax office (ATO).  Up to 72.8% of those who have invested in properties in Australia have only one property, in line with the data provided by the ATO.  The data equally stated that about 18% of property owners have up to 2 properties, while it also said 0.9% of property owners have 6 or more properties.

The idea of negative gearing seems to be part of the life of an average Australian.  This tax effective strategy is being promoted by factors, like growth in property values, historical low-interest rate, population growth and investment properties as a retirement asset, especially superannuation self-managed fund.

For many years now, the idea of negative gearing has turned out to become a professional service in many firms, leading to the necessity to identify several common areas where these who invest in properties usually trip up, as well as laying claims on loan interest.

Interest on loans

It is very important that a particular property is made available for rent or is rented in that particular income year in which you want to claim the deduction; if not, you are not entitled to claim the mortgage interest on that property. Once you stop using the property to generate income, it is not possible anymore to claim the interest you have incurred. On the other hand, you can lay claim to an interest that is charged on loans that are taken out provided the property is available for rent or is already rented. The interest taken out can be used:

  • For renovation
  • For repairs
  • For buying depreciating assets

You are compelled to start paying interest on any loan you have taken to renovate an existing property for rental purpose or to build a property for rental from the moment you are given the loan. If you suddenly have a change of mind about the property in question for any reason, like renovating or erecting the building for private use rather than using it for commercial purpose, you will not be entitled to claiming interest due to the change in plan.

Several things can affect your being able to enjoy tax deduction on several property expenses, including mortgage interest, are highlighted below:

  • The property is to be used for a given period for private purpose
  • You use the money you have borrowed for purchasing a new home while renting out the old home you occupied.
  • You have taken one loan that is being used both for private and commercial purpose
  • No payment is made by you on loan taken for the rental property since payment on the loans you have taken being made for the private aspect of the loan. The ATO advise home owners in this category to reduce interest claim on the split loan arrangement and come to an assumption that interest is not capitalized, but paid.
  • If the property is rented to friends or relatives at a value lower than market value.
  • If you are sharing home with a border.

You can use any of the financial products made available by banks for acquiring rental properties. You can enjoy redrawing faculties and flexible repayment in many of these financial products.  As a result of this, it is possible to take a loan to buy a private car and renting a property. In this situation, the amount you pay interest on the said loan needs to be divided into non-deductible and deductible parts in line with the amount of money you have borrowed for either purpose. Fluctuating balance may be a lot of any loan used for double purpose because of varieties of withdrawal and deposits.