Negative gearing seems to be getting a lot of attention recently and especially in the lead-up to the Federal Election.
Is it increasing the gap between the “rich” and the “poor” or
Does it actually help average Australians save for their future?
Is it good or is it bad for housing and rental affordability?
In this post, I’m going to work through the arguments for and against negative gearing to see how they stack up.
What is Negative Gearing?
Negative gearing refers to where a property investor loses money on their property because their costs of owning the property (including interest) exceed their rental income. This loss is tax deductible against their other income such as salary and wages.
The Common Misconception of Negative Gearing
Most people who say they want to get rid of negative gearing don’t really understand how it works, they think because you make a $10,000 loss you get that back in tax. WRONG! the amount an investor deducts only reduces their taxable income by that amount.
An example is someone on $80,000 who has a $5,000 negative return on their investment. At the end of the year this reduces their taxable income to $75,000, with the actual tax benefit being only about $1,500.
However because house prices in Australia have risen over the last few years, the capital growth on the property would generally outweigh these losses.
History of Negative Gearing
Negative gearing isn’t new – in fact it’s been around for almost 30 years. Before negative gearing, losses from investment properties could not be deducted against an investor’s salary and wages – they were effectively ‘quarantined’.
However after a period where rents increased rapidly across Australia, negative gearing was introduced to help reduce the cost of owning property in order to reduce rents.
Is Negative Gearing Good or Bad?
So in 2016 we are now faced with the same debate as in the 80s: is negative gearing a good thing or not?
This depends on who you ask.
What do the politicians say?
The Liberal Government has argued that prices of existing properties will be ‘smashed’ if negative gearing is removed. This could have an impact not only on home owners directly but also the economy more broadly.
Meanwhile, the Labor Opposition is proposing to limit negative gearing to new housing from 1 July 2017. Labor argues that this will help improve housing affordability whilst maintaining the incentive to construct new housing.
It appears that both parties are convinced that limiting negative gearing will reduce house prices. But before home buyers and property investors rejoice about falling prices, ask yourself, can you really trust a politician?
Even the Grattan Institute report, which has been mentioned countless times in the media that tax is only a MINOR factor when it comes to house prices.
Does Negative Gearing Affects Housing Affordability
The fact of the matter is, all sorts of things affect house prices –supply vs. demand, how the economy is performing, vacancy rates, foreign investment, the attractiveness of other investments, interest rates, lending regulations, the list goes on…
There are simply too many factors which affect house prices to predict which way house prices will go if negative gearing is changed.
Where do Mortgage Corp Stand
Personally, I don’t think negative gearing is about the “rich” versus the “poor”. Anybody who earns income can use negative gearing to their advantage. Property investors are not ‘depriving’ others from owning properties.
Most Mortgage Corp clients are simply average Australians who work hard and are willing to sacrifice their lifestyle short term to build a solid property portfolio so they can reach their financial freedom sooner.
In fact, one of the main reasons our clients invest in property is to ensure they have enough saved up for their future plans and retirement – negative gearing is often an unintended by-product.
Many of our clients would prefer a positively geared property AND capital growth – a positively geared investment helps them pay off their home FASTER.
Whether your properties are negatively or positively geared or you are not sure, it’s always important to make sure you structure your loans correctly to maximise your return. Request a FREE Loan Strategy Session and find out what structure if right for you.
About Mortgage Corp
Based in Mount Waverley, Melbourne, Mortgage Corp specialises in helping successful professionals and property investors access discounted premium rates, minimise loan approval red tape and apply strategic loan structuring for long-term investment success.
Unlike many mortgage brokers that may be able to help you with general loans but simply don’t have the skills, experience or resources to genuinely help property investors maximise long-term wealth, Mortgage Corp loan specialists help investors develop a strategic approach to property investing for long term investment success. Request a Free Loan Structuring Strategy Session with our 5 Star Lending Specialist Neil Carstairs today!
About Neil Carstairs
Neil is the founder of Mortgage Corp, an active property investor and awarding winning MFAA accredited finance broker with more than 10 years of mortgage broking experience. Currently, Neil is one of only 19 MFAA Certified Mentors in VIC/TAS region.
He is known for his strategic approach to investing and ability to reach fast, successful outcomes for clients where his industry peers could not. Connect with Neil on LinkedIn.