NEGATIVE GEARING

Without doubt “gearing”, negative or otherwise, has a significant impact on Australia’s property market. It affects everything from rental and home prices, to housing stock and even the rental vacancy rate. But what exactly is gearing?

Negative gearing

Negative gearing is when a property runs at a loss for the owner, with the costs of maintenance exceeding the rental income.  Those expenses include body corporate fees, council, cleaning, property management fees and repairs.

These kinds of investments are used to make long-term capital gains profit. The property is bought with the expectation that its value will grow over time, thus outweighing any short term financial losses. Negative gearing creates a taxable loss, which investors offset against their primary
income as a tax saving. Ultimately what this means is that your taxable income bracket and the amount of tax that you need to pay is potentially reduced.

A negatively geared property will usually remain negatively geared for a number of years but will eventually change due to increasing rent returns. The plan is to use your ordinary income to pay off the short-term costs of the home, then go on to profit off the sale of the home when its price has increased.

What are the advantages of negative gearing?

• The profits earned from selling a property that has grown over time far exceed the long-term costs
• With interest rates at an all time low, negative gearing is a popular alternative for investors
  a. Investors can spend money on developing the property and increasing its market value over time
• Investor demand for property supports the building industry, creating employment
• Tax benefits help individuals to become more self-sufficient towards retirement, encouraging saving and investment

What are the disadvantages of negative gearing?

Careful research is needed before buying a home. You need to ensure that the property will grow over time, rather than decrease in value

• Investors inflate the residential market, making it less affordable for first home buyers and other owner occupiers
  a. Investors need to sell while home prices are high, otherwise they face making a significant loss as the price of their home falls
  b. A high income is needed to maintain this investment strategy, with the home incurring costs over a long-term period of time
• High income earners get a tax deduction and overall benefits, essentially making the rich investors even richer

Taxes and negative gearing

As of 2016, Australia’s current tax laws encourage negative gearing. Those who own negatively geared properties can reduce the impact of the financial loss from their property, by
offsetting it against assessable income.

You can claim a tax deduction from the following expenses:
• Advertising for tenants
• Body corporate fees and charges
• Cleaning, gardening and maintenance
• Deductions for declines in value
• Insurance and legal expenses
• Loan interest and borrowing expenses
• Water, land tax and council rates
• Stationery, telephone and postage

The current dialogue about abolishing negative gearing is about these tax incentives. If negative gearing laws are abolished, then the cost of maintaining an investment property will increase dramatically. This will increase rents, and make the costs of owning an investment property far more substantial.

For an honest and unbiased opinion, talk to Think and Grow Finance today on 03 8390 5855 or email mitesh@thinkandgrowfinance.com.au

*Please note – Think & Grow Finance does not provide tax advice and the article above is general information only. Readers should always assess their situation accordingly and seek tax advice with a qualified accountant/taxation adviser.