You will have heard negative gearing making headlines recently as Labor and the Turnbull Government fight it out in the media about housing affordability in the lead up to the election. Although the Government promised not to touch negative gearing in its May 3 budget, we predict you’ll continue to hear a lot more about it as the election campaign continues.
What is negative gearing? You know it’s a buzz word that people use when talking about buying property, but what does it actually mean and how can it apply to you?
Negative gearing is a fairly simple concept to understand, so don’t be too frightened.
It occurs when cost of owning a rental property is greater than the income it generates. You then have to delve into your own savings or cash flow to make up the difference – so you record a loss.
The obvious question is, if you are making a loss each month, why would you buy an investment property?
The answer is two-fold. Firstly, property investment is not generally viewed as a short term investment, and long term capital gains can be expected to more than compensate for short term losses if the correct property is purchased.
Secondly, it is important to note that holding costs include non-cash deductions such as depreciation, so it is possible a property can make a paper loss, while still delivering a cash flow positive result to the owner.
Now that we know what negative gearing is, what are some of the advantages and disadvantages of negative gearing?
Tax Saving For The Investor
If you own an investment property operating at a loss, that loss can be claimed as a tax deduction on your income. This will result in a reduced tax bill, compensating the owner for part of the operating cost of owning the property. The media often promote that as only benefitting the rich, however the reality is it benefits all tax payers according to their tax rate.
Increased Ability to Build Property Portfolio
It is difficult to break into the housing market, however once you have a foot in the door it is a solid long-term investment strategy. Negative gearing tax advantages can help improve your financial position and be a positive piece in a diverse retirement investment strategy.
Increased Rental Property Numbers
There is and always will be need for properties available for rent. Shortage of properties for rent drives up rent costs, and increases demand for government housing, adding extra costs and pressure to government budgets. Having a competitive rental market is advantageous for renters.
Effect On Housing Prices
Housing prices are primarily a function of demand and supply. Negative gearing increases demand for investment properties, therefore has an impact on driving up property prices.
We should note however, that negative gearing is just one element affecting housing affordability – not the sole driver.
Negative gearing an investment property means you suffer short term losses. It is important for an investor to assess the increased risk associated with this, and have appropriate measures in place to cover unforeseen circumstances (for example, a cash flow buffer account).
Consideration of possible future increases in interest rate, and future job security is paramount. The worst time to sell your property would be if Australia has fallen victim to a major economic disruption, which for some will be when they are forced to sell.
Should you negative gear your investment property?
Before buying an investment property, speak to a mortgage broker or financial adviser with experience in this area. They will help you consider benefits and risks like possible future interest rate increases, job security, the economic market and more, and help you decide if it’s a strategy that’s right for you.
Call us with your questions about negative gearing on 03 9511 8883 or email firstname.lastname@example.org