What is negative gearing?

What is negative gearing?

Been watching the news? Well what on earth is Bill Shorten on about? What on earth is negative gearing?

One of the biggest debates currently raging on Social Media, and in parliament is around Negative Gearing.

Has been the case for quite some time. Ever since it’s inception, it’s been a constantly debated topic among property investors and critics. For many first time investors, the concept is completely and utterly foreign.

So, lets break it down.

What is it?

In simple terms, Negative Gearing occurs when the cost of owning a rental property is greater than the income it actually brings in. This loss, is called a ‘taxable loss’, which is then offset against other income.

Officially, the Australian Tax Office calls it “A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.”

So why?

There are numerous benefits to an investor. These are mainly in the form of the ability to offset costs associated with your loan and renting the property against your tax bill.

Some of these include interest, costs of setting up the loan, letting fees, advertising, rates, land tax, strata levies, insurance, repairs, maintenance, depreciation and more.

Break it down…

Lets take a loose example. So lets say that a property may have ‘cash costs’ (includes interest, bank fees, maintenance, insurance, fees, for example, anything you had to actually pay for) of $56,000 in a year. The rental income for that same period is $40,000. This is a loss obviously. A $16,000 net rental loss.

This $16,000 shortfall can be used to reduce your taxable income (that figure you see on your PAYG), which can provide benefits. These losses can also be used to offset when your property is sold.

What’s Bill Shorten wanting to do?

He is proposing from July 2017 to stop the ability to claim back on expenses for any ‘existing properties’ purchased after that time, so for the above example you would no longer have the ability to claim back on the $16,000 – unless its a ‘new home’ that is purchased post July 2017

Secondly Shorten is talking about reducing the Capital Gains Tax Discount (the discount you would receive on Capital Gains Tax payable on an investment property held for more than 12 months) from 50% to 25% when selling the property.

Some say this will cause a further spike in ‘existing’ property prices as investors will try and gobble up existing properties before the deadline, others believe it will create more opportunities for first home buyers to hit the market as there wont be as many ‘investment opportunities’.

Regardless only time will tell if Labor does come into power and the consequences of this proposal will be in your favour.

What does the experts think?

First Home Buyers Australia (FHBA) have been advocating for increased assistance for First Home Buyers and Generation Y buyers in one of the hardest and fastest climbing markets.

Daniel Cohen, from FHBA says they support the Labor Party Measures, “Certainly, we believe that these policies are better than the outdated ones we have currently”.

FHBA were fully behind the Capital Gains Tax changes, however had some comments about the changes to Negative Gearing.

Taj Singh from FHBA says that “we believe it would have been a better outcome if negative gearing was wound back equally across both established and new properties. This would have the effect of not adding any additional unneeded rental price pressures. It would also mean that first home buyers wouldn’t find it even harder to buy new homes, such as popular house and land packages. We have previously proposed that interest, one of the biggest tax deductions investors’ claim, be reduced from 100% deductible to 50% deductible.”

There are many differing opinions however the real test will be the implementation of these measures.

|Disclaimer| 

We aren’t tax specialists, the above scenario is simply our opinion, remember to always speak to a tax/finance specialist before making knee jerk decisions. 

 

 

Author

Michael Turner is a Property Development and Analytics Specialist operating in Sydney's Growth Centres and corridors. He is a Director of YPI, along with several roles at property development firms and agencies. He can often be heard on various radio mediums talking about Football and Property. You can find him on Twitter @mturnerypi or email him directly at m.turner@youngpropertyinvestor.com

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