Negative gearing is once again a hot topic in the news.
But what exactly does it mean, and how could it impact you? Let’s break down how negative gearing works, why it’s favoured by many investors, and why it’s garnering renewed interest.
The Australian Property Market
Australians have a strong affinity for property, with over 2.2 million adults (more than one in ten) owning an investment property. So, why is property investment so appealing?
Investors can enjoy regular rental income, which provides additional cash flow to help cover the investment loan. Historical data shows that, on average, national property prices have increased by 10.9% per year over the past century (according to AMP insights). This trend can lead to significant capital gains upon a sale, often eligible for a 50% capital gains tax (CGT) discount.
But there’s another factor making property investment attractive: the potential tax savings associated with negative gearing.
Understanding Negative Gearing
In simple terms, ‘gearing’ refers to borrowing to invest. Negative gearing occurs when the costs associated with owning a property—such as loan interest, council rates, and insurance—exceed the rental income the property generates.
Investors can then report this loss on their tax return, benefiting from potential tax reductions on their overall income, including salaries.
Tax Savings Example
Consider this scenario: Deb earns an annual salary of $125,000 and, after tax plus the Medicare levy, pays $28,288. She recently purchased an investment property that generates $25,000 in rent, while her annual costs total $35,000, resulting in a loss of $10,000.
By claiming this loss, Deb reduces her taxable income to $115,000 ($125,000 – $10,000). Consequently, her tax obligations decrease to $25,288, yielding an annual tax saving of $3,000. This savings can effectively contribute to paying off her investment home loan.
One important note: Many investors may not be experiencing a true loss on their investments, as property values often appreciate over time. However, those capital gains are, of course, subject to capital gains tax (generally at a 50% discount).
Why the Renewed Interest in Negative Gearing?
The current buzz around negative gearing stems from Federal Treasurer Jim Chalmers requesting Treasury modeling to assess its impact on housing supply. While Prime Minister Anthony Albanese has assured that “we have no plans to touch or change negative gearing,” political landscapes can shift rapidly.
It would be a significant move for any government to eliminate negative gearing, especially considering that approximately 2.2 million property investors, many who use this strategy, are also voters.
Thinking About Investing in Property?
Before diving in, it’s wise to consult with a tax professional about the implications and benefits of negative gearing for your situation. While this strategy can work for many, it’s not one-size-fits-all.
If you’re considering investing in property and want to explore financing options that can help you achieve your goals, reach out to me today. I’m here to evaluate your borrowing capacity and provide insights on leveraging equity in your current property to make your investment dreams a reality.
0447654321
