Negative Gearing

This winter sees Australia going to a federal election which is heating up with the political discussions around negative gearing.
The below post from the Real Estate Conversatrion outlines some interesting points for those who own investment properties.
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Late in April of 2016, Malcolm Turnbull published a detailed blog response to The Grattan Institute’s report, Hot Property: negative gearing and capital gains tax reform.

John Daley, joint author of the report and CEO of The Grattan Institute, has fired back in The Australian Financial Review.

In his blog post, Turnbull notes that the proposed changes to negative gearing outlined in the Grattan report are actually not the same as Labor’s proposals. For example, Daley is proposing phasing in the changes over 10 years, and will not grandfather existing investments, neither of which are Labor’s policies.

The authors disagree that negative gearing is a “generally accepted principle” in Australia. Turnbull thinks it is, because the policy has been in place for more than a hundred years. But Daley argues that no other country, except New Zealand, allows taxpayers to deduct the interest costs of investment from their wages.

Where Turnbull says changing negative gearing arrangements will have dramatic effects on the housing market, Daley is saying that the overall impact would be modest, but the mix of investment in housing would be different.

Daley agrees that fewer middle-and-low-income earners might be able to afford property investment if Grattan’s proposals are introduced, but the changes “should proceed anyway.” Turnbull says pushing middle-and-low-income earners out of the investment property market isn’t “fair.”

Turnbull is concerned that lowering the capital gains tax discount to 25% would make the effective tax rate on real capital gains almost 70%, one of the highest in the world. He also believes that Labor’s proposals would remove a third of buyers from the property market, causing a significant fall in prices. Daley argues the rate is closer to 55%. Daley also points to the government’s paper on tax reform, which suggests that taxes don’t significantly affect the level of investment in the economy.

The debate rages on and ultimately will, as Daley points out, “lead to better policy.”

Negative gearing

Negative gearing occurs when the cost of owning a rental property outweighs the income it generates each year. This creates a taxable loss, which can normally be offset against other income including your wage or salary, to provide tax savings.

Let’s say for example that Bill owns a rental property generating $25,000 in rent each year. The costs of holding the property, including mortgage interest, come to $30,000. This gives Bill a taxable loss of $5,000, which he can use to reduce the tax payable on his salary.

Gearing often plays a significant role in all investor’s strategies. Knowing your investment strategy is important, and getting expert financial advice is smart if you need help identifying the right approach to maximize your profits.