All Topics / General Property / negative gearing

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  • Profile photo of investroninvestron
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    I wish everyone would stop poo pooing negative gearing.
    I have been doing it for 17 years, had 18 i.p’s., sold 10, kept 8, now retired on $60,000 /a.

    If you are paying a lot of tax, wouldn’t it be better to pay interest instead, at least you end up with something.

    Profile photo of woodsmanwoodsman
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    I tend to see the two like different routes to get to the same destination.

    James

    Profile photo of theloanarrangertheloanarranger
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    Different strokes for different folks. +CF vs neg geared will always raise an argument. I’ve got both, each aquired for different reasons.

    +CF props DO allow you a lot more scope though, i.e. instant income, additional borrowing capacity, etc.

    theloanarranger

    Profile photo of ShusharShushar
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    Originally posted by investron:

    I wish everyone would stop poo pooing negative gearing.
    I have been doing it for 17 years, had 18 i.p’s., sold 10, kept 8, now retired on $60,000 /a.

    If you are paying a lot of tax, wouldn’t it be better to pay interest instead, at least you end up with something.

    Well done for your great acheivement – however for many people the problem with -ve gearing is they don’t have the initial income and borrowing capacity to continue to buy properties.

    [glum]

    Shushar

    “All our dreams can come true, if we have the courage to pursue them.” – Walt Disney

    Profile photo of yackyack
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    Growth from negative gearing properties takes patience. You need the growth from properties to become wealthy.

    Noone has any patience on this web site. They all want it now.

    Profile photo of richmondrichmond
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    sweeping generalisation yack, my man… not all here are after the easy quick fix… I think it’s a bit harsh to be so disparaging.

    cheers
    r

    Profile photo of yackyack
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    Ok. I apologise. Even I want a quick fix. I am starting to feel a little anxious paying extra for my latest ve- property knowing that the market has somewhat cooled.

    Profile photo of RugbyfanRugbyfan
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    Investron

    I agree with you. I have made my point before that I am for a diverse portfolio. This includes both -ve, neutral and +ve CF properties. I am in it for the long haul as I don’t see a quick fix with +ve CF. I would need 100+ to get a decent income so my wife and I wouldn’t have to work. Quick fix – I don’t think so!

    ‘Eat rich food, barbeque a yuppie’ [greedy]

    Profile photo of milkmanjrmilkmanjr
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    investron,

    Just curious as to your position 2-3 years ago?
    How has the market improved your portfolio?

    Milkman

    Profile photo of investroninvestron
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    The improved market helped me sell 3 in the last 12 months, but I actually semi retired in 1995, and full retired now.

    I still feel I’m paying too much tax, so I’ll buy more property soon.

    Profile photo of kay henrykay henry
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    I think one thing people don’t discuss with pozz gearing is that one still has to pay tax on the profit made weekly. So if one earns $10 net a week, and is in thehighest tax bracket, $4.80 0f that will be taxed. So one is making $5.20 a week.

    Investron, I am not sure people are “poo-pooing” neg gearing… I think poss gearing has been a way for some people to get into the market- to buy super cheap properties, as opposed to buying a 300k property in sydney 8 years ago that may now be worth $1 million. Many of us have never been able to afford to do that :o) But of course, I don’t know anyone who’d knock back such a capital gain either.

    If you’ve done so well over time, then you can sit back and watch others’ choice of investment strategy and know that it wouldn’t work for you, but obviously it does work for others.

    Of course, houses now are so exxy everywhere that pozz gearing means buying cheaper and riskier houses- which is too risky for some of us. But my strategy has always been to buy cheap places, because it’s what I felt I could afford. Now the “cheapies” that were accessible to me years ago are now more than doubled, and don’t seem good value anymore. But then again, my salary has quadrupled since I bought my first place, so I guess I’ve done ok.

    Speaking of retirement… I am quite happy to continue working to improve my situation. Pay rises are one way of improving one’s income, and it means we don’t have the angst of constantly thinking about raising rents or selling off an IP to get more money.

    kay henry

    Profile photo of the Philosopherthe Philosopher
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    There seems an odd presumption that the +ve involves having lots of properties paying you very little. Why not pay off your properties faster than the 25 year mortgage? Especially with cheap properties this can be easy to do and increases your return from those properties exponetially. Better stil it doesn’t have to slow you purchasing more ips since you can leverage against the properties you have paid off.

    Profile photo of redwingredwing
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    Agree in principle with paying off your + geared IP’s faster, however the interest on my PPOR is not tax deductible, so i’m reducing my non-deductible debt ASAP, meanwhile building Equity in the property..

    Negative gearing is part of my strategy, i for one acknowledge the CG prospects with it, however when it becomes + geared.. i wont be selling it as it’s lost its tax benefits..so achieving a ‘balanced portfolio’ is my goal..

    REDWING

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    Profile photo of gatsbygatsby
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    G’day Investron,
    Well done! You obviously used the right tool for the right problem (ie. How can I use property to retire?). I’m a bit of both (cf+ and cf-). End of the day if something works then it’s irrelevant if it’s a placebo or the real thing, it’s the results that count.
    Cheers,
    Gatsby.

    Profile photo of ghotibghotib
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    Did that 17 years include the last attempt to abolish negative gearing? Do you remember what the exact terms of the change were? By that I mean, presumably the legislation (regulation?) didn’t say “negative gearing is abolished”, but something about “deductions for interest on loans to purchase investment residential property are not allowable”. Also presumably, some interest was still deductible under some circumstances; do you remember what they were?

    I know politicians and others regularly make noises about negative gearing and last time investors managed to make a bigger noise. But speaking as a citizen as well as an investor, I think the tax treatment of residential property investment is excessively generous and will have to change sooner or later.

    Cheers,

    Ghoti

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    Profile photo of DerekDerek
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    Hi Ghoti,

    Negative gearing on newly purchased investment properties was abolished in mid July 1985. For those of us lucky enough to own a property at the time the deductibility of interest remained in place.

    Negative gearing was reintroduced as an allowable deduction in middish 1987.

    Interestingly enough – depreciation as an allowable claim was introduced to offset the loss of interest deductions around the same time. During the two year window capital depreciation claims were 4%/annum over 25 years – in some respects people were no worse off due to the recognition of depreciation as an allowable claim and encouraged the savvy investors to more heavily focu their buying on newer properties.

    1985 was also the time that CGT on residential property was introduced.

    The abolition of negative gearing also coincided with a 40% jump in demand for public rental housing in NSW.

    statitical reference – More Wealth From Residential Property

    Derek
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    Profile photo of ghotibghotib
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    Thanks Derek. That’s the first case I can think of where a compensatory tax concession stayed in force as temporary taxes so often do [cap].

    However, this further reinforces the idea that present tax treatment is overly generous. Let’s say negative gearing remains too hot to touch: what changes to depreciation or CGT treatment do people think might be on the drawing boards?

    Actually, just asking the question suggests that fiddling with depreciation allowance would also be extremely politically “courageous”. Which kinda leaves CGT, or something completely new. Anyone got any thoughts?… nightmares??

    Ghoti

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    Profile photo of DerekDerek
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    Hi Ghoti,

    In my opinion – the current trend for state and federal governments is to ‘outsource’ as many services as possible – in some respects public housing falls into this category.

    I understand private landlords (investors) provide the great bulk of housing for non-homeowners and as such bean counters will need to be sure of any flow on effects, and their costs, before contemplating such a move.

    The most significant deduction for proeprty investors is the interest component of loan borrowings – these costs are deductible for businesses and other investors too and would require a major rethink on tax legislation.

    Given GST and the tax bracket creep makes us one of the higher taxed nations and the current government has collected a windfall through these avenues – I am not sure there is a need to review this aspect of tax legislation.

    That is not to say it could never happen but I would argue there may be some tinkering of the edges and when normal market conditions return the issue may well go away anyway.

    My tip is an alteration of the GST rate – from memory GST legislation only allows for GST rate adjustment if all states and the federal government agree. Labour wins the federal election and we have a grand slam – all governments labour.

    Comment from someone who does not have a degree in economics.

    Derek
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    Profile photo of redwingredwing
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    Negative Gearing Under Attack

    Tax concessions for property investors – including negative gearing and
    the concessional capital gains rate – are distorting the housing market
    and should be reviewed, according to the Productivity Commission’s
    review of home ownership.
    The investigation into barriers to first-home ownership will also
    increase pressure on state governments to follow New South Wales’ lead and
    effectively abolish stamp duty for first-home buyers. Rejecting the
    states’ arguments that stamp duty does not act as a barrier to home
    ownership, the Commission has indicated that increasing the deposit first-home
    buyers must save introduces another hurdle.
    Both major parties are reluctant to consider changes because of fears
    that it could increase rents and discourage investors. Negative gearing
    was last tampered with by the Hawke government in 1985, which sent the
    supply of rental property plummeting. Two years later treasurer Paul
    Keating was forced into reversing that decision when rents went through
    the roof.
    According to new financial modelling by Deloitte Touche Tohmatsu,
    removing the tax benefit from property investments will increase rents by as
    much as 80 per cent, putting a greater burden on public housing and
    making it harder to save that first home deposit for those still in the
    private rental market.
    The commission has toughened its stance, arguing that current tax
    breaks to investors in property and trusts are overly generous, compared
    with other investments such as shares. At present, when an investor sells
    a property, capital gains tax applies only on half the profits.
    The submission from Professor Cameron Rider of Melbourne University’s
    Law School argued for a change to the tax treatment.
    “With the capital gains tax discount you have an absolute certainty
    that one half of your gain will be tax-free. People have seen the
    combination of negative gearing, depreciation and capital gains tax discount
    can be marketed as a residential investment product to produce a
    significant tax advantage.”
    Mr Costello defended the concessional rate of capital gains tax, saying
    that the objective was to encourage people to put money into
    investments and save for the long term. He has also ruled out abolishing negative
    gearing, despite the Reserve Bank’s warnings that “further examination”
    is required of the laws that allow investors to reduce their tax by
    writing off the costs of an investment property.
    Concern has centred on the ability of some investors to purchase
    multiple loss-making properties under the current negative gearing tax laws,
    with some analysts calling for a limit to be placed on the use of
    negative gearing.
    However, Housing Industry Association chief economist Simon Tennent
    warned that further government interventions in an already cooling
    property market could not have come at a worse time.
    “To be trying to put out the flames of the inner-city investment unit
    market at the expense of mum and dad investors is just dangerous,” he
    said.
    Macquarie Bank economist Brian Redican lays much more of the blame for
    spiralling house and apartment prices on the October 1999 capital gains
    tax concessions, which virtually halved the impost placed on investors.
    There is no coincidence that the biggest surge in investor borrowing
    for housing has occurred since capital gains tax was reduced, says
    Redican.
    However Redican makes the point that negative gearing is simply not as
    valuable in the low interest-rate environment we now live in. Investors
    adopting a negative-gearing strategy normally borrow as much as
    possible against their rental property. The higher the interest rate they pay,
    the bigger the deduction. A property is negatively geared if the cost
    of owning it, including interest on borrowings, is greater than the
    rental income it produces. The owner can claim a deduction for the
    shortfall against other income.
    On the flip side, capital growth has been very strong for the past few
    years, says Redican, making the halving of CGT an attractive incentive
    for investors. Another major driver, he says, is that the increasing
    proportion of households on the top marginal tax rate has meant more
    people have been exploring tax offsets.
    The Macquarie Research Economics study found that negatively gearing a
    property was not attractive unless it also had good capital growth
    potential. It found that even if negative gearing was scrapped, borrowing
    to invest would still be attractive as long as the property was expected
    to deliver strong capital gains.
    In another blow to property investors in a cooling market, the
    Australian Taxation Office recently announced a review from July 1 of
    depreciation rules on residential investment, which allow a building’s fittings
    to be claimed as a loss for negative-gearing purposes.

    Courtesy of Noel Whittakers Newsletter- a great source of Information

    “Money is a currency, like electricity and it requires momentum to make it Effective”
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    Profile photo of TzakiTzaki
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    Wow! Thanks Redwing good informative post.. sorta indicates that there are a lot of viewpoints out there in the government circles!!

    Bracket creep has meant that more folks are on the top tax rate than ever before – making it more attractive to -ve gear..

    I -ve geared my first 3 properties (well.. after tax they gave me money.. but I needed the tax breaks to get there… so I still call em -ve geared) and thier CG since 2000 has been great… but you can only afford to hold so many -ve geared properties, hence I am on the hunt for +ve geared properties… to pay the -ve geared ones. Of course now I have the equity increase from those 3 properties to gear into +ve cashflow properties!!!

    So.. I see the advantages of both meathods!

    Steve Kerr

    Opportunity knocks softly, listen carefully!

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