What is negative gearing?
Negative gearing refers to the tax offset available to investors that is available in the case that the rental income from a property is less than the interest repayments required to finance the loan on the property For example: You purchase a property that requires weekly interest repayments of $500 and the property rents for $400 per week, the difference of $100 per week is deducted from your taxable income and may result in a tax rebate at the end of the financial year.
What is equity?
Equity is calculated as the market value of a property less the mortgage owing on the property. For example, you own a $500,000 property and have $200,000 remaining on the mortgage. The equity built into the property in this case would be $300,000 ($500,000 – $200,000).
What is Releasable Equity?
Releasable equity is the amount of equity the bank will allow you to use, transfer or access to secure further investments. Typically banks require a minimum of 10% equity to remain within the property, in order to secure the loan in the event of financial hardship. Therefore if we follow the example above, we need to calculate 90% of the value of the home, as this leaves 10% equity in the property.
Releasable equity would therefore be;
$500,000 x 90% = $450,000
Subtract the mortgage owing on the property;
$450,000 – $200,000= $250,000
Releasable equity will always be lower than gross equity.
What is capital gains tax with regards to property investment for individuals?
Capital gains tax is the tax paid on the gain made through investment. At present it is not payable on an individual’s principle place of residence, only on the investment properties they hold. For an investment property, a capital gain is calculated as the net realisation subtract the cost base. Currently investors also get a 50% discount on their capital gain, which means they are only liable for tax on 50% of the capital gain. The portion of the capital gain remaining that they are liable for tax on is calculated at your individual marginal tax rate.
Net realisation = Sale proceeds – Selling Costs
The cost base is a little more complicated, but for simplicity can be calculated as;
Cost Base = Purchase Price + Purchase Expenses – Depreciation Claimed Over the Life of the Asset.
You purchase a property for $300,000 and your purchase expenses are 5% ($15,000).
You sell the property ten years later for $800,000; you pay the real estate agent 2% ($16,000) to sell the property.
During the ten years, you have depreciated $40,000 and offset it against your tax.
Net Realisation = $800,000 (Sale Proceeds) – $16,000 (Selling Costs) = $784,000
Cost Base = $300,00 (Purchase Price) 0 + $15,000 (Purchase Expenses) – $40,000 (Depreciation) = $275,000
Capital Gain = $784,000 (Net Realisation) – Cost Base ($275,000) = $509,000
Subtract 50% discount on capital gain = 50% x $509,000 = $254,500
Taxed at your marginal tax rate (for example 32.5%) = $254,500 x 32.5% = $82,712.5
What is cash flow positive?
Cash flow positive is the opposite situation to negatively geared, it means that your property is positively geared. This occurs when the rental income earned from the property is greater than the interest repayments required to service the loan. For example you purchase a property that requires weekly interest repayments of $400 and the property rents for $500 per week; your property is positively geared by $100 per week. This is treated as income and is taxable at your marginal tax rate.
What is a dual income property?
A dual income property is a property that has two tenants and therefore provides two steams of income or ‘dual income’. It will be commonly the case that the property is split in two with an adjoining wall, therefore providing two adjoined properties on a single block of land. These properties are typically positively geared and can be useful for increasing income relative to expenses.