Everyone's talking about negative gearing
Whilst the property market in Melbourne’s north-west is continuing to perform in the positive manner that we have been reporting in recent weeks, we thought this would be a good time to touch on a topic that looks set to be widely debated over the coming months. As we all know, negative gearing looks set to be a key issue in the upcoming federal election, but in talking to a lot of people around our area, it seems that not everyone understands what negative gearing is, so here’s a bit of a run down.
What is negative gearing?
In most cases, negative gearing affects someone who has borrowed money to purchase an investment property, but the interest on the loan is more than the income they receive in rent, meaning the investor makes a loss for the first few years until they reduce their loan amount, or they increase the rent they receive.
Under current tax laws, this loss can then be deducted from other income, in most cases the investors wage from their ‘day job’, reducing their overall taxable income in that financial year.
Positive gearing is what happens when the interest on the loan is lower than the net rental income. In this case the investor is liable to pay tax on this income at their marginal tax rate.
Why do investors use negative gearing?
Obviously, a property investor’s aim is to make money from their rental property in the long term. The idea is that any losses will be short term and outweighed by long-term capital gains. A landlord normally expects rental income to increase over time as the property rises in value and inflation plays its part. A negatively geared property normally becomes positively geared as time goes by.
The debate on negative gearing
As we approach the federal election, you can expect the volume on the debate about negative gearing to go up a notch or two. Whilst the full details of the Labor party’s policy are yet to be fully laid out, they have made clear that they plan to cut back on the ability of property investors to use negative gearing as a means of getting their foot in the property market. Some people think this will improve affordability levels for those first home buyers who are struggling to buy their first home, other are less sure about this. Other people are concerned about setting a precedent that actively discourages Australians from securing their own long-term retirement plans by setting the barriers too high for first time investors. We’ll leave you to make up your own mind on what this may mean.
Important questions on negative gearing
No matter what your political beliefs or financial position, there are two important questions that we think need to be answered as this debate moves forward, and we hope to see some answers before the vote takes place.
- If we are going to discourage Australian ‘mums and dads’ from becoming property investors, who is going to provide all the rental accommodation that our growing population will need? After all, if rents go up in the face of a shortage of available rental properties, that will actually make it harder for them to save a deposit for their first home, not easier.
- Why should property investors be treated differently from every other profit-making venture which can claim its interest costs as a deductable business expense?
As always, if you have any questions about the property market in general or your own property in particular, feel free to call the team at Barry Plant Taylors Lakes on 03 9390 8333.
Best wishes,
James Hatzimoisis & John Aaron Nakic
Directors – Barry Plant Real Estate
Taylors Lakes, St Albans & Caroline Springs