by Jason Fittler
Quite often people call us to discuss buying a rental property as they have a tax problem and need to negative gear. I have previously discussed how the benefits of negative gearing are decreasing as the government continue to cut tax rates. (That is a good thing.)
So today I would like to take a look at how a negative geared property stacks up to a positively geared share investment. In this example I will not be looking at the overall growth of the investment.
Let’s start with the old favourite, the investment property. Say a $400,000 investment property of which you have borrowed 100% and you are receiving rent of $350 per week with a marginal tax rate of 30%. Income of $80,000 pa.
Rent $18,200 pa
Interest $30,000 pa
Net Loss $23,800
Tax Benefit $7,140
End of the day you would receive a $7,140 tax benefit. (you would get a $7,140 tax refund)
Now let’s take the same $400,000 and invest the funds into fully franked shares yielding 5%.
Income $28,570 pa
Less interest $30,000 pa
Net Loss $1,430
Tax benefit from loss $430
Franking Credits $8,570
End of the day you would receive a $9,000 tax benefit. (you would get a $9,000 tax refund)
Without taking into consideration any growth of the underlying investments, if you are looking to reduce your tax you will get a better result investing fully franked shares.