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We have just renovated a place, we are in the process of deciding whether to stay here, or to sell it and buy a unit to rent out and buy a place to live in.
Just wondering if anyone can tell me in laymans terms how negative gearing works??
If we keep this place, we would have to borrow 100% for the place we live in. If we sell, we will have a fair bit of equity to put to either the investment or the place we live in. Not sure which would be better?
TIA!
If you have an investment, it's best to have that mortgage your highest, and the one you live in the lowest mortgage. For tax purposes, you can claim back on things like the interest you pay on your investment property, expenses, real estate agent fees etc.
I'd reccomend speaking with an Accountant to see what your best to do.
Thanks Jodi - i thought that would be the best way, but if we keep this and rent it that won't work out the best. I think we should sell and buy both.
Do you want to sell the place you are in? You may have enough equity to purchase a rental property anyway. Keep the equity in the house you live in, and borrow as heavily as you can against the investment. You may be able to rejig your existing loan structure to do so. Might be worth chatting with your bank mgr to see what sort of finance options are available.
See I dunno MD - if we stay here we will want to extend. I figure it's easier to just buy a bigger place! Too many options, I have the mobile lender coming next week for a chat but want a heads up if he starts talking complicated bank stoof.
ETA: Our mortgage is only around 1/3 of what the property is worth so plenty of equity.
My brother said its always best to borrow 100% on an investment property because you can claim all out of pocket expenses on your tax.
However, if something started as your residential property and then you move out and turned it into your investment property - you can't claim the interest you have to pay on your mortgage, something you can do if its 100% investment use only.
Thats how he explained it to us anyway.
Arimeh's eden is partly right. You can only claim what you currently owe back on tax, so if your loan is small it might work out better if you sell that and buy both an investment and house for yourself. You can't just refinance so the loan is huge, its only what you borrowed to buy/renovate that counts. Don't forget capital gains tax - if you sell it you don't pay tax on the profit - if you move elsewhere and then sell down the track you'll pay tax on the part of the profit from after you left it.
Negative gearing is just claiming all the expenses back against the rent. You can claim interest (not the payments, just the interest), council rates, water, property manager fees and a raft of other stuff. If your expenses are higher than the rent, it reduces your income and you will get a tax refund. Otherwise, you have to pay tax on the rent you earn.
i don't know much about negative gearing from a tax POV, but something to keep in mind - whatever you have as an investment "loss" reduces your taxable income, so you pay less tax, but is added back on for FTB purposes so it doesn't reduce your ftb income at all