Negative Gearing – Accounting Firm Sydney

Easy Tax is a professional accounting firm bases in Sydney, we can advise you on the best negative gearing tax breaks.

In a perfect world it makes sense that when you own a home and move, you could then take out a loan on the old home while renting it out and use that loan to negatively gear it as a rental property. Then you would take that money and apply it towards the new home purchase. Perfect - except for the fact that it is illegal to claim on the negative gearing in this case. That is to say, the Australian Taxation Office (ATO) will not allow it.

To see this more clearly, here’s a couple of negative gearing property examples. The first is my own. The second is that of the ATO.

Example One

Let’s begin with Jack who is steadily employed. He purchased for himself a small unit in an old block. The unit was perfect for Jack as it was in a quiet area close to work and within walking distance of the beach. He diligently paid as much off his home loan as possible thinking that the faster he paid it off, the sooner he would have money for other things.

Within five years Jack had almost paid off his home loan. Then, to his surprise, he met Jill. They couldn’t live without each other, and they decided that two could live more cheaply together than separately. You know the story. Unfortunately, the unit, well it just was not big enough or classy enough for their combined new home.

Jack and Jill then decided to purchase a new, bigger, and better place to live and booked a meeting with their mortgage broker to ask for a new loan. “Wouldn’t it be a good idea to shift the equity in the old unit to the new place and then let the old unit. It would then be negatively geared! That would reduce my tax, and just think of the tax refunds!” Jack said to Jill. He started to plan with Jill how they could benefit once the loan on the old unit was transferred to the new property.

This is where the problem arises. To achieve a tax deduction, you can not transfer a loan that is for income production to a home loan nor can you transfer a loan from one home to another without the old home that previously carried the loan losing it’s tax deductible status on the amount that has already been paid off the loan. This is a real frustration to investors who find themselves in a position where they want to move the equity in an old property to their new home.

Most people want to move the equity over to their own home, because owning your home gives you a greater sense of security. After all, you don’t want to share ownership of your home with a bank.

You can take a loan on the old home (which you are now renting) and use it as collateral to purchase your new home. You just can’t at the same time achieve a tax deduction on that particular loan. However you can move a loan from one investment to another investment and still receive the benefits of tax deductability.

Example Two

Here’s the ATO’s example which also highlights what you can and cannot do with regards to negative gearing property:

Bill is a computer programmer. He is offered a job in Darwin and decides to relocate his family there. He borrows $200,000 from the bank and purchases a house in Darwin. He makes the minimum monthly payment of $1650. After two years the balance on Bill’s home loan is $186,000.

Then Bill receives a $50,000 windfall and decides to pay this money off his home loan. This reduces the balance to $136,000. As luck has it, Bill is then offered a job in Perth. He decides to take the job and relocate his family. He decides to rent out the house in Darwin and borrow to purchase a new residential property in Perth.

Bill redraws $50,000 from the Darwin loan and uses this as a deposit for the new home in Perth.

Bill can deduct the interest accrued on the outstanding loan principal of $136,000 that is related to the Darwin house from the date that property is available for rental. Those borrowed funds are used at that time for income-producing purposes. As the new borrowing of $50,000 is used as a deposit on the residence in Perth, the interest on that borrowing will not be deductible as it is incurred for a non-income producing purpose. (TR 2000/2).

From this you can see that you simply can not transfer equity from one property that is paid for to another that is to be your home and again claim deductions on the first property.

So what can be done to transfer the ownership in one property to another? The simple facts are that you would have to sell the property that has been paid for and incur all the sale costs in order to transfer your equity from one property to another. You may think it is unfair but that is one of the quirks in Australian tax law. Unfortunately the Tax Man has made sure you can not have your cake and eat it too.

For more information and advice on negative gearing, contact Easy Tax today.


Take advantage of our small business accounting services during which we will help you to refine your needs and consider an accounting and tax planning solution for your business going forward… make an online enquiry today or call us on +61 2 9419 5322 and let us help you solve your accounting or tax problems.

Comments are closed.