For property investors, negative gearing is their silver bullet to making fortunes easily. If you kept up with the negative gearing debate in the lead up to the election, you’ll know that not everyone’s on board with the investment tactic. In fact, the Reserve Bank was backing Labor’s call for tighter regulation of negative gearing.
Labor wants to stop investors reining in on tax deductions and the capital gains tax discount (CGT), which are negative gearing’s huge benefits. But why? And why should first homebuyers care?
What is negative gearing?
Negative gearing is an investment tactic that allows property investors to claim losses on tax. Investors are happy for the rents to not cover the expenses because. When this happens, they pay less tax. They’re happy because they know the property is going up in value. And it’s a pretty darn common practice which sees a lot of property investors do very well. In fact, the ABC reported that 60% of Australian landlords made a loss for the 2013-14 financial year.
What is the capital gains tax discount?
This is something the Howard government introduced back in 1999. It means that half of the profits from the sale of an investment property go untaxed if the property is kept for at least a year. According to the ABC, the CGT discount for investor-owned properties cost the government more than $6 billion last financial year.
Pros and cons of negative gearing
When a negative creates a positive
If you’re an investor with a keen eye for property in Sydney, negative gearing is a common way to create more wealth.
You can depreciate all the fittings and fixtures in your property, which gives you a tax break in June.
On top of that, negatively geared properties will eventually become positively geared – that’s operating at a profit – as rents begin to rise at a higher rate than the interest on the mortgage.
Meanwhile, property values also increase. This means that when investors sell their property and pay off their mortgage, investors that use negative gearing can come out on top.
The dark side of negative gearing
But here’s the thing about negative gearing – you’re operating at a loss. Which means you’re losing money. Did ever such a sentence sound positive to you? No! This is only okay if the capital growth of the property (way) more than outweighs the ongoing losses. Negative gearing is a side benefit, not a strategy.
Negative geared properties mess up your cash flow. You’ll need to pay out of your own pocket every month to keep the property going.
Negative gearing – cruel and unusual for first homebuyers?
One of the major arguments against negative gearing is the fact that investors have the means to pay more for property, which pushes up property prices. With Sydney’s property prices already some of the highest in the world, some say this pushes first homebuyers out of the Sydney property market.
And despite forecasts of a relatively flat market going forward, many struggle to get off the rental merry-go-round. According to research by Genworth in 2011, the average age of a first-home buyer increased from 25 in the 1970s to 31. Queue all those stories about Gen Y staying at home, leaching off their parents.
The future of housing affordability
Despite Sydney’s high property prices, we can’t go blaming baby boomer investors and negative gearing entirely. Other countries that don’t have to ability to negatively gear properties face similar problems with housing affordability.
Either way, negative gearing looks like it’s here to stay.
If you’re buying your first home in Sydney, want to refinance your mortgage, or invest in a new property, an honest, genuine mortgage broker can give you the advice you need. We can help you access loans from all the major lenders and more, and help with all the paperwork.
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