In the lead up to the recent federal election the hot button topic of negative gearing was a key election point. So what is it, and what are the pros and cons of negative gearing?
Negative gearing, while commonly used in the context of real estate assets, can apply to any income producing asset including listed shares. It is essentially where the tax deductible expenditure related to the asset (including interest payments) exceeds the income the asset generates (i.e. you are spending more than you are receiving) and the amount of loss incurred is allowed to reduce your taxable income from other forms of income like wages. This lowers overall tax payable and often results in a year end tax refund. A tax incentive to buy property should in theory stimulate economic growth and keep the housing market active.
A lot of investors who buy assets do so with the intention of making a profit on the long term growth of the asset, so while they may have negatively geared the asset during the period they held it, the intention is for the capital growth of the asset upon sale to exceed the losses they incurred while holding the property after factoring in selling costs and potential capital gains tax liabilities.
The Pros?
Every dollar of negative gearing loss can potentially get back your marginal tax rate as a tax credit (up to 47c for every dollar spent depending on your earnings)
Borrowing against an asset may allow you to purchase in higher growth that may have been out of reach with lesser borrowings.
The Cons?
The tax break you receive will for the most part never be greater than the loss, which can make cash flow an issue when it comes time to pay mortgage repayments and ongoing property expenses.
First home buyers and owner occupiers find it more difficult to secure property when the market is shared heavily with investors looking to secure a property for their portfolio.
The purpose of an investment is to make money – if you negatively gear it and then sell the property for the same or less than what you purchased it for you would be worse off financially than before you purchased the property.
Pro-tip
Already negative gearing? Don’t wait until you lodge your tax return to get the tax benefit of negative gearing. The ATO allows you to vary the amount of tax your employer withholds so you can effectively get your negative gearing benefit throughout the year.
Other related blogs:
Changes to depreciation for rental properties
Changes to rental property deductions
Less known rental property deductions
Author: Nick Vincent
Email: nick@faj.com.au
