Let’s get into positive gear
IT’S time for some positive thinking on negative gearing. Gloomy rumours have been circling the real estate sector in recent weeks, focusing on potential changes to negative gearing rules in May’s Federal Budget.
Real estate investors claim about $8 billion a year of rental property tax losses, according to the latest Australian Taxation Office data. Much of that is through negative gearing arrangements where their expenses - such as interest, council rates, depreciation and maintenance costs - exceed the income received by the property.
Critics argue negative gearing is just a tax dodge for wealthy investors. It certainly benefits those on higher tax rates, who get a bigger bang for their tax deduction buck.
There is talk that negative gearing may be restricted to new homes only. This sounds like a good idea in principle if the aim is to spark home building activity to fuel jobs growth and help address Australia’s undersupply of housing. It’s not so good for investors who have been benefiting from the generous tax rules for years, although it’s likely that any changes would only affect future property purchases.
Whatever happens in the budget, many people are still missing the big picture.
Negative gearing should not be the aim of a real estate investor. You should be aiming to have all your properties positively geared - where the income exceeds your loan interest and other expenses.
That’s because negative gearing an investment means you are losing money, and have to rely on capital growth for any profit. The reason you get a tax deduction is because you spend more than you earn on a property, and the deduction only puts your tax rate back into your pocket - perhaps 34 or 46.5 per cent of your losses.
But positive gearing means you are making money. Sure, you’re paying tax on the income, but you are still left with a profit.
You’d rather earn $100 a week and pay 30 per cent tax on that, than lose $50 a week, right? Yet many investors still think negative gearing is the way to go. The ideal investment is one that puts cash in your pocket while growing in value longterm. Many experts say firsttime investors should only target positively-geared properties.
If that’s your goal, any changes to negative gearing rules shouldn’t bother you at all. Anthony Keane is the editor of Money Saver HQ, which appears in The Advertiser on Mondays.