Basic negative gearing question

[Tyler Durden]

I read this article from news.com.au about negative gearing. The relevant bit is as follows:

Again, let’s take the above example of the $200,000 investment property and how it might affect your cashflow. Let’s say you and your partner are both on tax rates of 30%.

So:


1.Rental Income $15,000
less
Interest costs $16,000
Other costs $4,000
Depreciation etc $2,000


Net loss $7,000
@ 30% tax rate $2,100 refund.

My question is, why is a person's tax rate applied to that net loss? My initial (and very basic) understanding of negative gearing was that the whole of that net loss (ie. the $7,000) could be used to offset your personal income tax?

Thanks for putting up with a newbie question.

 

[YELNATS]

I read this article from news.com.au about negative gearing. The relevant bit is as follows:



My question is, why is a person's tax rate applied to that net loss? My initial (and very basic) understanding of negative gearing was that the whole of that net loss (ie. the $7,000) could be used to offset your personal income tax?

Thanks for putting up with a newbie question.

In short, you have misunderstood negative gearing. The net loss of $7000 is applied to your marginal income tax rate, 30% in this example, and you are reimbursed accordingly.

 

[bbker]

1.Rental Income $15,000
less
Interest costs $16,000
Other costs $4,000
Depreciation etc $2,000


Net loss $7,000
@ 30% tax rate $2,100 refund.

They applied it to the loss in isolation to show you the effect of tax on it.

Say your income is $60,000. The amount above $35,000 is taxed at 30%. i.e. $25,000@30%.

Ignoring offsets and other factors, let's assume the figure is $25,000 - $7,000 = $18,000 so 30% of 18,000 = $5400 payable.

Or in separate income-loss parts, 30% x 25000 - 30% x 7000 = 7500 - 2100 = $5400 payable.

So they are effectively pulling $2100 out of the above to show how it's factored in.

 

[Tyler Durden]

Great, now I understand. Thanks guys

 

[davede]

Hi Tyler,

Hope Joe doesn't mark this as spam but thought you might find this guide on property and negative gearing useful.

What is negative gearing?

Regards,

Dave

 

[Tyler Durden]

Hi Tyler,

Hope Joe doesn't mark this as spam but thought you might find this guide on property and negative gearing useful.

What is negative gearing?

Regards,

Dave

Thanks Dave, much appreciated