We (my partner and I) have just bought a 4 bdrm home in Grenada Village, Wellington as we needed more space after we had a kid. Instead of selling our current 3 bdrm home, we're planning on giving it out on rent.
I recently came across something called 'negative gearing' when reading up on property investment. Since we've got a much bigger mortgage now, any money i can get back is very helpful so keen to see if it would be applicable to my case.
I understand that i could use the losses from this investment to offset the income both of us get from our day jobs (we're both in the IT industry as permanent employees) but not sure how exactly that loss is to be calculated as there are two properties here only one of which is eligible to be used to claim for losses.
Would i need to separate the mortgages so i know exactly how much i owe for each one? This could mean using two different lenders as my current lender has said it's not possible to split it up like that.
Case Study for reference:
Penny, a property investor, buys a unit for $300,000, putting in $50,000 of her own money and borrowing the remaining $250,000. The interest of 7% each year is $17,500 and the weekly rent is $300 or $15,600 a year.
Ongoing costs including rates, water, insurance, maintenance and depreciation allowance are $2600 each year. After expenses, income for the year will be $13,000 ($15,600 minus $2600), equivalent to a net rental yield of 4.3%. However, annual interest repayments are $17,500, so she has actually lost $4500 during the year ($17,500 minus $13,000 = $4500).
The Result: Penny is eligible to receive a tax deduction of the loss accrued.
Any comments appreciated?