andrew63

What's this about in laymans language?
Looking at investing in property and been told that this is what helps but not quite sure what it means.
Anyone doing it?

Andrew

Siren & Brian

You borrow money to buy investment property and the repayments and other associated costs are more than what the tenant pays in rent. therefore you have made a loss and this loss will reduce your gross pay and therefore reduce the tax you will have to pay at the end of the financial year.

MartinLuther

The idea is that the expenses for the house (mortgage, repairs, depreciation, etc...) are more than the rent. This loss can then be offset against your income.

In this situation the ATO shares the burden of your loss at your marginal tax rate. So, assuming your on the 40% tax rate, and your loss is, say, $100 then the ATO effectively pays $40 and you only lose $60. In the meantime (or rather in the longterm) your property's capital value should have gone up to offset this loss. For simplicity, if you made a profit of $100 on the sale of your property (and you owned it for more than 1 year) then you would only pay $20 of tax meaning that you would be $20 better off (less interest on $60 loss).

Obviously this only really works if the capital gain is higher than the losses (plus interest) AND you have the cash flow to support the loss from year to year.

Their is a potential side benefit in that you could drive your income down low enough to start receiving benefits of some kind.

wheatsheaf42

In economic theory it also means that if the rental is not enough to cover the associated costs of holding the asset- interest on borrowing and service costs for example-then the property is over-priced.

You are also gambling on higher property prices to not only make a capital gain when the property is sold but also to cover the regular loss incurred by holding the asset in the first place. If the salary income against which the loss is offset disappears, eg through redundancy, then the cash flow would have to be funded somehow but the income tax offset would be lost.

With property prices alleged to be over-valued at present that is a big risk to take.

MartinLuther

I agree - I wouldn't do it.

The only case I would do it would be if I had a mortgage on my own home. In this case I would increase the investment property mortgage to reduce my personal mortgage.

Ozzidoc

You're better off going for positive gearing if you can - why aim for a loss when you cna make a profit?

jad n rich

It was a pretty popular tax strategy when the top tax rate (about 49.5%) with medicare kicked in at around $68,000 a year

Top tax rate was changed last year, since then negative gearing does not benefit so many people, hence the current rental crisis.

NedKelly

Negative Gearing is a concept invented by real estate agents to sell overpriced property to unwashed investors.

JAJ

There is no such thing as a "rental crisis" in a free market economy. If what you are saying is that rents are rising and capital values falling, then that's just the market coming back into balance from unsustainable figures a few years ago.

Negative gearing is an unjust feature of the tax system that rewards Australians who dabble in an excessive debt, and penalises those unable to afford to do so. Or smart enough not do so.

Other developed countries - eg United Kingdom and United States - have some fairly tight restrictions on offsetting "passive" losses (eg rent) against "active" income such as employment. Australia is unusual in allowing this.

But at the end of the day a loss is still a loss, even if it's tax relieved and getting a 48c tax rebate still leaves you 52c poorer.

jad n rich

Yes a loss is a loss, the profit would come from any capital gains on the property.


Rental crisis is a term used by the australian media to describe the current low vacancy rate on the rental market, dont know if its affecting your area, dont even know where that is, however I would also use the term if I was one of the families being housed in a tent by one of the local councils as is happening in some shires here. There are far less properties to rent as the property investors have left the market.

i think australias kept negative gearing for many reasons, they dont have to provide state housing if the rental market is good, and people in OZ are required to provide their own pension, many have done that through owning a second property.

Didnt they do away with it once and bring it back in, probably for those reasons.

NickyC

Yes, they did. Paul Keating scrapped negative gearing in the 1980's - it came back in pretty quick when all the labour-voting renters suddenly had no-where to live...

JAJ

I'm not sure if I follow that - real property doesn't vanish into thin air just because "negative gearing" becomes less attractive.



Yes, between 1985 and 1987. But the removal of negative gearing was basically done as a tax grab. Had it been linked to a tax reform (eg using the revenue to drop the top tax rate down to 35% or so) then the change would have stuck.

mbike

We know of three families here in Perth who have had to move out of their rentals because the landlord decided to cash in on the boom.

JAJ

But the houses haven't disappeared, have they?

spalen

They have to the rental market... We've had our last 2 rentals sold under us. Its a nightmare