Rental losses
Question from jaswant updated on 20th June 2016:
I own a property in Auckland and enough equity to buy a rental property. But I am not sure whether it's worth buying or not. I have some questions - like:
1) What happens if our rent is lower then our mortgage?
2) Can we claim any loss, if we are not getting enough return and on top off it we are paying rates, insurance as well?
Our expert Mark Withers responded:
If the rental income the property generates is less than the interest cost of money borrowed to buy it and the holding casts associated with owning it, the property is referred to as negatively geared, and its making a loss. In this situation the loss can be offset against other taxable income.
But remember, that the loss is not refunded, only the tax rate applied to it. So, for example if your loss is $100 and your effective tax rate is 33% your refund of tax is $33 - meaning you still have a cash deficit of $67. So no amount of tax relief will turn a sows ear into a golden purse.
Expectations of capital growth or a savings regime that has you retiring the mortgage are generally forefront in a purchase decision. At present with interest rates in the 4 - 5% range it is more common to see investments producing cash surpluses, especially if there are two rental streams from the property. The million dollar question though is, how long will they last ?
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.
