NEGATIVE GEARING: HERE TO STAY?

Negative gearing is now part of a political football game between Labor and Liberal parties. All the property news has focused on the recent announcement by Labor that, if elected, they will take away “negative gearing” for established property, leaving incentives only for “new” properties.

So what is negative gearing?

You hear “negative gearing” all the time from your tax accountant or financial advisor – so what is negative gearing? In simple terms it refers to the expenses of your property such as interest on loan and property management exceeding your rental income. Those losses are tax deductible against other personal income. Personally, I have been using negative gearing to my advantage for over 15 years. I must say early on – I did not understand the advantages however used negative gearing to increase my position of wealth in recent times.

What can I claim?

Property owners may be able to claim deductions and depreciation against rental income of the property. Key classes of deductions are included below:

1. Revenue deductions

This includes interest on the loan, property management fees, insurance and body corporate, cleaning and water amongst others.

2. Capital items & Building Allowances

Capital items such as white goods are subject to depreciation and capital works for the building can be claimed over 40 years. A qualified Quantity Surveyor will assess this. There is a cost in obtaining a depreciation report, however its worth it.

Is negative gearing a hand out to the “rich”?

No, it is not. There are almost two million property investors and many of them own only one investment property with a taxable income of less than $80,000. Therefore, it’s the “average joe” who wants to increase their wealth and will use negative gearing to create wealth. Its definitely not the cause of the “property bubble” – negative gearing has been around for generations – during this time property prices have went up, down and sideways – negative gearing is not to blame.

What is positive gearing?

You can positively gear a property, where your income exceeds your expenses from the property – this can also be referred to as net positive cash flow. This can occur when you have a high rental yield on the property (this occurred at the peak in mining areas).

What are the risks of negative gearing?

Negative gearing can be risky, and can only be recommended where capital gains are expected in the long term. If the value of the property falls and/or interest rates rise – you may be paying for additional costs that are not covered by potential tax deductions.

Is Negative gearing good or bad?

The answer is it depends. Negative gearing is good for some investors and bad for others. It depends on the investor, their strategy and the property that is invested.

Where to from now?

Labor’s proposed policy to limit negative gearing to new properties has the benefit of encouraging more investment in new housing supply which may put downward pressure on existing houses. However, we are currently experiencing a risk of “oversupply” of new property in large capital cities such as Melbourne, Sydney and Brisbane.

With a sustained investment in new housing using leverage, this is a recipe for disaster in my view – we are already seeing large inner city developments with high vacancy rates in capital cities, why encourage more? My view is – its not broke, so don’t fix it, banning negative gearing is just a revenue earning exercise. I look forward to Scott Morrison’s response later in the week.