Negative Gearing Explained

In Short

It goes like this – say your rental income off a property for a year was $40k, and the expenses such as interest and rates and repairs and maintenance were $60k. That would mean there would be a $20k loss on the property. We’ll also assume you earn $150k before tax each year.

You then do a tax return and tell the IRD that you shouldn’t have paid tax on $150k – you should have only paid it on $130k – being the $150k salary less the $20k loss. We can tell you that the tax on $150k at personal tax rates is $49,770, but on the $130k it is only $41,970. So that means you save tax of $7,800. See the table below.

So this means that the loss you incur on a rental is less than you might think – you need to make sure you account for the potential tax saving.

Tax legislation introduced in New Zealand in 2010 ruled out the ability to claim depreciation on buildings for rental properties. It may still be possible to claim depreciation on the chattels of the dwelling (e.g window coverings) however there is debate as to whether this it’s worth it. We recommend taking advice from a property tax expert.

Published on Monday, October 18th, 2010, under Finance, Law, Insurance

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