negatively geared + tax refund

[HattrickNZ]

if you have a negitively geared property, can you use that to get a tax refund, from the tax you pay on a salaried income?

based on this tax calculator, if someone makes 80K they pay 17,320 in tax.

Then if they have a negatively cashflow investment property of say 10k for the year, and let us say this is interest only.

How much of a tax refund do they get?

Am i right in saying they pay the 17,320 and they can then get a 10K refund or am i largely mistaken?

Also this is an interest only example how would this work of a P+I type mortgage? Appreciate if someone could shed some light on this for me?

[marklowes]

if you have a negitively geared property, can you use that to get a tax refund, from the tax you pay on a salaried income?

based on this tax calculator, if someone makes 80K they pay 17,320 in tax.

Then if they have a negatively cashflow investment property of say 10k for the year, and let us say this is interest only.

How much of a tax refund do they get?

Am i right in saying they pay the 17,320 and they can then get a 10K refund or am i largely mistaken?

Also this is an interest only example how would this work of a P+I type mortgage? Appreciate if someone could shed some light on this for me?

You are partly mistaken yes. And that conception of the type of refund is common and likely why a lot of people think neg gearing is a good thing.

The 10k loss comes off your salary, so before the loss you paid tax on an extra 10k money over what you actually earnt for the year (once the poor performing property investment is included).

What you get refunded is only 33% of that loss (i.e the extra tax you overpaid to start with).

So a 10k loss = $3,300 tax refund.

People often say 'buts its tax deductable' as if it's a 'free' expense. Its actually more like a 33% discount, which is nice, but your still spending 67% out of your own pocket.

Unless you earn several hundred thousand a year neg gearing will see you hit servicing limits with banks very quickly, so you'll buy 1, maybe 2 rentals and be stuck unable to buy anymore for a very long time.

P+I mortgage or interest only makes little difference, only the interest expense can be claimed against rental income not the principle payments. You'll end up with slightly higher interest expense over the financial year on interest only as no principle is being paid off, hence why if you have debt against own home and rentals it pays to go interest only on rentals and put all cashflow into getting own home debt free (as interest on debt on own home is not tax deductable, so 49% more costly.)

[Azimuth]

How does it work with respect to child support? I'm pretty sure that losses can't be used to reduce child support assessments (which seems fair), but what about the rental income? Does anybody know if that counts as income towards the assessment?
It would be logical that it would only come into play if the property is making money, but it might be brave to assume that logic comes into it!

[Rosco]

How does it work with respect to child support? I'm pretty sure that losses can't be used to reduce child support assessments (which seems fair), but what about the rental income? Does anybody know if that counts as income towards the assessment?
It would be logical that it would only come into play if the property is making money, but it might be brave to assume that logic comes into it!

IRD seem to have their own weird and wonderful way of calculating child support sometimes. We have a handyman client who only makes say $40k gross profit (sales less direct purchases), then has vehicle, phone, ACC, accounting and other costs. But IRD somehow calculate his income on a $50k income.

There are strange rules around questioning how the income is worked out, and even when obviously wrong you struggle to get this changed. I think you get two challenges, but after that it is set and you can't change.

So in theory, the total income for child support excludes rental loss. But with the people calculating the child support income in IRD, I wouldn't be surprised to see the rental income added, but no expenses deducted.

Ross

[Azimuth]

That could be quite catastrophic. Perhaps it can be looked at as the LTC not providing an income to me, once losses are taken out? I don't see the rent myself of course - I'm just the director of the company which receives it.
I hope it doesn't get too messy after the end of the financial year...

[Dood]

Negative gearing is not investing imho

That could be quite catastrophic. Perhaps it can be looked at as the LTC not providing an income to me, once losses are taken out? I don't see the rent myself of course - I'm just the director of the company which receives it.
I hope it doesn't get too messy after the end of the financial year...

Why would you buy a property that requires a top up every week just to ensure continuity of ownership?

[cube]

Because of the magic of capital gains.

[Bob Kane]

Why would you buy a property that requires a top up every week just to ensure continuity of ownership?

That's a good question if you intend owning it for a few months.
But investing is a long term thing and you'd be a bit unusual to think rents won't go up over 10 years or so.

[Azimuth]

Why would you buy a property that requires a top up every week just to ensure continuity of ownership?

In this case the property is subdividable, and my intention is to park a house on the back of the section and once completed have 2 positive yield properties in what will hopefully be a long term gain area.

[HattrickNZ]

tks for that explaination mark.


so like you say it is still costing you, on a positive it is only 67% as apposed to the 100%, that is at least something.
And I never really looked at it this way but, is another way of looking at it is that you get a cheaper interest rate of 3.35%(=5%*67%)?


Can you still get the tax refund if the investment property is in your own name or does it have to be owned by a company to benefit from the tax refund?


in relation to this "(as interest on debt on own home is not tax deductable, so 49% more costly.)" can you explain the 49%, should it not be 33% more costly?

[Rosco]

Hi HattrickNZ,

I would suggest you spend some time and money up skilling. Something like an initial meeting with us or GRA, to understand more on how rentals work and linked to your personal situation.

Company - can't offset loss against your personal income. Losses stuck in company, until company has other income or you can loss offset (subvention payments)
LTC - can offset loss to your income, presuming you are the shareholder
Sole trader - rental loss would offset your income
Partnership - normally 50% of loss to you, and 50% to your partner

All presuming it is a rental loss.

Ross

[Anthonyacat]

in relation to this "(as interest on debt on own home is not tax deductable, so 49% more costly.)" can you explain the 49%, should it not be 33% more costly?

This is just a trick of Math.

If a mortgage costs $10,000 per year in interest:

a personal home mortgage costs the person $10,000.
a rental home mortgage costs the person $6,700, after tax benefits.

$6,700 divided by $10,000 is 0.67s
So you can say that the rental property mortgage is 33% cheaper.

However, $10,000 divided by $6,700 is 1.4925
So you can say that the private mortgage is 49.25% more expensive.

Both are true.

Thinking about it another way, if you're used to getting a 50% discount on an item at the supermarket, then the discount goes away, you don't see a 50% increase in the price you pay. Your price doubles (increases 100%).