Let’s get into pos­i­tive gear

The Advertiser - Real Estate - - Clifton St, Camden Park - ANTHONY KEANE

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.

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