What is Negative gearing?
Negative gearing involves borrowing money to buy an income producing asset, such as a rental property, when the asset won’t be able to produce enough income to cover the loan payments, cost of maintenance, interest, or depreciation in the short term.
In other words, the costs associated with the rental property are greater than the rental income – that is you make a loss. As a taxpayer, you are able to claim that loss as a tax deduction, thus increasing your potential tax refund, regardless of whether the rental property is a new property or you buy an existing property.
What is a Capital Gain in relation to a rental property?
When you sell a rental property for more than you paid for it then you have made a capital gain. Under the tax rules, the ATO will allow you a 50% discount on your capital gain if you have had the rental property for more than one year.
For example, if your rental property cost you $550,000 and you sell it for $650,000 after one year then you have made a capital gain of $100,000. When it comes to tax time the current tax rules will only tax you on $50,000 (you get a 50% tax discount) at your marginal tax rate.
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