How Negative Gearing Can Help You Save Tax?
For those of you who do not know negative gearing in terms of real estate, it simply means the rental income from your rental property is less than rental expenses.
In terms of cash flows, it may mean you are contributing more money from your own pocket every year to maintain your rental property, but on the positive side, you can claim the rental loss against your full-time income.
For example, you earn 50k per year and your employer withholds around 8k tax from your wage and you receive a net income after tax 42k.
Let’s say you have a rental property with a net loss of around 5k (rental income minus rental expenses), as per tax laws, this loss can be offset against your wage income of 50k.
When you file your tax returns, your taxable income will be around 45k (50k wage minus 5k rental loss) and assuming you have no other deductions, your tax bill will go down to 6.3k (45k using marginal rates) and you will get a refund of 1.7k from the taxman.
On average, any rental losses creates savings of 32.5% every year and the other positive side is sometimes the rental losses can be maximised by including depreciation expenses which are non-cash expenses.
Does that mean, it is good to buy more investment properties to maximise your tax refunds? The answer is absolutely YES!
In Robert Kayaski book “Rich Dad Poor Dad, Robert explains simple 4 factors on how to build up wealth and the second most important factor is to get into a real-estate market which helps you pay less taxes.
The above illustration is mainly from a tax point of view, but again there are many other positives of buying rental properties and of course, the biggest one is capital gains which means the market value of a property will go up in the next couple of years.
If your monthly cash flow supports, it is ideal to buy investment properties to create passive income and build up more assets and wealth in the long run.
Disclaimer – Please talk to your financial advisor or accountant before you consider making this decision
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