We’ve heard a lot of debate about ‘negative gearing’ in Federal Parliament – and the media. This has left many people wondering just what the fuss is all about.
So, what is negative gearing?
Basically, negative gearing is when an investor borrows money to buy an investment and then expects to run the investment at a loss, at least for a while. They can then claim the costs of owning and running the investment, including interest charged on the loan and depreciation, as tax deductions. It’s usually used for investment real estate, but can also be used for shares, bonds, and other assets.
With negative gearing, the amount the property is rented out for is less than the interest on the money borrowed (and other outgoings). On the surface, this sounds like a bonkers investment plan, but it relies on the value of the property rising, and on being able to claim those tax deductions.
One of the main principles of tax in Australia is that costs incurred in earning income should be tax deductible. If borrowing money is required to earn money, then that becomes a tax deductible expense.
If you are using or considering using a negative gearing strategy, it’s important to talk with your tax accountant to see if it will work for you. Some initial things to think about include:
- Choosing the right investment property.
- Negative gearing only works if the asset is going to increase in value.
- It’s important that you have enough funds available to cover any periods the property is not rented out, as well as for any repairs and maintenance.
Why is negative gearing in the news?
Obviously there are benefits with negative gearing and a lot of people have figured this out. Many ‘mum and dad’ investors are borrowing to buy one or more investment properties.
The main issue is that they are competing in the same market as first home buyers. Investment properties are often the same affordable choices for those people who are trying to buy real estate for the first time. This, it is claimed, has been forcing up the price of affordable housing, and first home buyers are unable to compete.
In the recent 2016 Federal Budget, the Turnbull Liberal Government has decided to make no changes in this area. Labor has said it will make some adjustments, e.g. only making negative gearing on property only applicable to purchases of new homes.
The Reserve Bank of Australia too has some concerns about negative gearing, stating that discouraging it might be a good thing for Australia’s long-term financial stability.
Residential developers argue that negative gearing promotes investments in Australia’s housing industry, making more houses available for all. They also argue that changes to negative gearing will affect confidence in the market, as a productive real estate market relies on property values rising, or at least remaining stable.
The Australian Tax Office reported that over the last years the number of investors using negative gearing has dropped from 1.69 million in 2009 to 1.25 million in 2014. This has mainly been because loan interest payments have dropped during that time, making negative gearing a less attractive investment strategy. On the up side for investors, they should be able to pay off their investments quicker.
If you are considering purchasing an investment property with thoughts of negative gearing, we encourage you to contact Hart Partners today.