Following the quite generous tax cuts in the 2006 budget (and presumably more to come before the election) will negative gearing become more and more unattractive to average investor?
Back in 2003 the top tax rate of 47c kicked in at $60K but now anyone on under $75K is to pay a max of 30c. Obviously this is good for paying tax but bad for tax deductions. Someone on $65K (a higher than average mum and dad investor salary) 3 years ago could claim the full 48.5% back on rental losses but now someone on $65K can only claim 31.5%.
To me that makes negative gearing quite a bit less attractive. Does anyone think this will reduce the level of negative gearing for property? Will this see the mum and dad investors shifting their investments – especially in light of the booming share market.
Will this have an accumulative effect on house prices following the rate rise and rocketing petrol prices? Especially if people spend their $10 a week tax break (on petrol?) rather than save it and we see further pressure on inflation…
Any comments?
Funny you mention that but on Budget morning SMH had article in its regular money feature, titled like “When will negatively geared investors sell”
A lot of these people believe it will double every 7 years (heard that a lot here as well) and for buyers in 2002-2004, well they may be a ltlle concerned about their plans right now.
I’m an accountant and among my peers we know of a lot of neg investors bleeding big time, in the hopes that the market will turn around if they just hold on long enough.
Many of them are early to mid 50’s and this is their big strategy for retirement. They literally cannot hang on for 10 years as they intended to wait seven, take the profit and retire with a Mil.
How long they will wait will be interesting.
Oh there’s still time, gmh. If somebody had bought a random house in suburban Sydney for $550k in 2002, sure it might be worth $490k now, but who’s to say it won’t be worth $1.1m in 2009? Assuming no growth this year, it will only need to see 33% gains per annum in 2007,8 & 9. Oh, I see your point. It’s just not going to happen.
I guess there’ll be an awful lot of property investing books, websites and spruiker-seminar materials that will need to be rewritten. The next growth industry?
F.[cowboy2]Cruel.
But true
It all comes down (in my opinion) to why you buy, where you buy and if you can afford to buy. We are negatively geared, happily so. The tax cuts don’t make any difference to our long term strategy.
Our houses are all in good capital growth areas, rents are creeping up and we are “relaxed and comfortable”. I am sure there are overstretched people out there, though, and that is why it all comes down to the why, where and if.
Wylie.
I once read that most people who Negative Gear are “NOT” in the highest Tax Bracket..
Certainly true for me..
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorWe have several who despite expressing our concerns have negatively geared down to the zero tax threshold.
Another accountant once had this conversation.
Acc ” your refund is $xxxxxx”
Client ” but … I thougfht it would be more, after neg gearing”
Acc “well actually you have got back ALL your PAYG w’holding… you can’t get back any more”
Client ” ….but the guy at the seminar said…”
We have also had clients sell inner city departments, held for 5 years that after taking purchase and sell costs netted a loss. But hey at least they got some refunds.
G’day all,
My strategy is to use the $ from the tax deduction on negative geared properties to help service the interest only loan. With the tax break announced in the 2006 budget I will simple use that cash in place of the reduced tax deduction. Obviously the change won’t be equal but I certainly don’t see any problems especially when you factor in the increased upward pressure on rental returns caused by the interest rate increase. I’m with Wylie on this one. What do you all say?Pud
Capital Growth on my IP’s are still racing ahead (approx $100k equity in 6 months), rents are rising, Depreciation is a Bonus as is the ITWV each pay week..
If i get into a positive cashflow situation I refinance and purchase again to achieve some balance (think Nuetral Gearing as a goal)
Times like this when i have great equity I also look to top up loans and set a buffer if needed
Rates are fixed and IP’s are stand alone..I’m also looking long term..
I agree with Wylies post as well
You need to look at the reasons you purchased..yield, leverage, tax benefits, growth etc and your long term plan
PS- You’re paying less tax so you actually get to ‘keep’ more of your income
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorOriginally posted by Pudestcon:when you factor in the increased upward pressure on rental returns caused by the interest rate increase.
Can you explain how interest rates rises cause rent increases.
Always thought rent like all commodities was supply and demand.
Originally posted by Pudestcon:With the tax break announced in the 2006 budget I will simple use that cash in place of the reduced tax deduction.
This seems to make sense. Those who are currently negatively geared won’t find their situation much changed. However, those considering purchasing a negatively geared property will find it less attractive, as a $10k annual rent-deficit will now leave most people considerably worse off than before. For example, many taxpayers will have dropped from the 42% tax bracket 2 years ago to the 30% bracket. Where a $10k rent-deficit would have cost them $5800 per annum, it will cost them $7000*.
This makes future negative gearing less attractive than it was in the past, and is likely to further reduce demand for such properties. Agreed?*Rough calculations, and not applicable to all cases.
Cheers, F.[cowboy2]
<edit> Just re-read the original question and realised I’d just repeated less precisely the same sort of example. However, my main point is still – this will have negligible impact on current -ve gearers, but a significant impact on potential future -ve gearers.<edit>
gmh454,
In answer to your query…….
I reckon that there will be more demand for rental properties given that the interest rate increase will discourage more people from taking out housing loans to buy their own ppor and therefore increasing the number of people who require rental property; and all this in a climate where there is not much construction of new rental properties happening, at least on the eastern seaboard.
In any event; I’m in for the long haul and have not over extended myself so the present situation is OK with me.Cheers,
Pud
Negative gearing has some more sinister tax affects in that when your income is used to calculate medicare , family payments, ect your negative loss is added back to calculate your income. I had a negative geared property but I sold it as I couldn’t afford the loss. Another area for using negative gearing is when you own another property that is producing taxable income the negatively geared property reduces your over all property income for the whole portfolio.
Hmmm, I hear what you are saying, but what if the neg gearing investors who are bleeding have to dump their townhouses and units, after another rate rise ????
Would’nt that put downward pressure on property prices encouraging a shift from renting to buying , and hence a further softening on rents.
Also think a lot has been said in Sydney of Rental shortages, we do not have a shortage we are just returning to neutral.
2% is our historical neutral becasuse it means 1/2% in Nth Shore and Coast, and up to 5% in Penrith.
Also there is a LOT of stock still sitting with developers who are now just starting to cut prices. A 37 T/house development in Glenhaven selling very slowly for the last 18 mths has just cut the price from 480 to 450.
They are very good T/houses too not like some of the rubbish that was churned out. (we have a 8 T/house O/55 development that has not sold 1 in a year in same street.)
Just not sure about this pressure on rents.
Originally posted by Duckster:Negative gearing has some more sinister tax affects in that when your income is used to calculate medicare , family payments, ect your negative loss is added back to calculate your income. I had a negative geared property but I sold it as I couldn’t afford the loss. Another area for using negative gearing is when you own another property that is producing taxable income the negatively geared property reduces your over all property income for the whole portfolio.
[blink]
I knew someone that qualified for free medical etc etc many years back..just because it appeared that they had no money..the truth was somwhat different though..
good or bad money management..i’m not sure..
when you think about the tax that Alan BOND or Kerry PACKER paid..autobiographies are interesting
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorFoundation,
Where you say “Where a $10k rent-deficit would have cost them $5800 per annum, it will cost them $7000*.” This really means an extra $1200 per year or $23 per week. If you had to take a LOC to cover this short fall then the actual cash from your pocket (to pay the interest only) every week is only $1.62 assuming 7% interest on the LOC.
I reckon if I was in such a situation $1.62 per week out of my pocket is a small price to pay to keep control of an asset increasing in value over time. Similarly, if I was contemplating getting into property through negative gearing then an extra $1.62 out of my pocket each week would not make the deal less attractive.Pud.
Originally posted by Pudestcon:This really means an extra $1200 per year or $23 per week. If you had to take a LOC to cover this short fall then the actual cash from your pocket (to pay the interest only) every week is only $1.62 assuming 7% interest on the LOC.
I reckon if I was in such a situation $1.62 per week out of my pocket is a small price to pay to keep control of an asset increasing in value over time. Similarly, if I was contemplating getting into property through negative gearing then an extra $1.62 out of my pocket each week would not make the deal less attractive.Sorry if I misunderstand, but are you suggesting that a prudent investor would borrow additional money each year to cover the interest payments on a negative-geared investment?
[blink]
Good grief! What is the world coming to?
Could you possibly provide a worked example that outlines the capital gains required on, say, a 3.5% yielding, $300k house with 10% deposit for somebody in the 30% tax bracket? How much house price inflation is required to make such a deal worthwile (including repayment of the capitalised losses) over 10 years? 15? 20?Cheers, F.[cowboy2]
Foundation you keep forgetting that property doubles every 7 years, so in 20 years it will be one year short of a 800% increase no matter what the annual wage rate increase or inflation.
How can you loose ??????
That assumes that the rest of the world is stupid enough to keep loaning us money on no productive assets.
Sorry could’nt help myself.
Hope that minerals boom keeps running, and the long term economists are wrong.
Why do people buy investment properties? If the motivation is simply tax deductions, then perhaps they should look at alternative investments. If, on the other hand they buy for the long term, surely any short term negative loss would be well and truly offset over the long term by the end value of the property. Utilising P&I loans for 30 years simply means that the tenants will eventually pay off ALL your debt on the property. The decision to buy should then be made on your ability to fund any cash flow shortages. The net cost of these cash flows allows for the controlling of the asset value over the entire term of ownership. Many people have made lots of money holding vacant land in prime areas. no income, no tax breaks, just good capital growth.
What do you do with the funds from positive geared property? Buy more property? Why? To increase your net wealth over time in equity in the properties. Same end result. The difference may be the potential capital growth of the positive versus negative geared property. Your decision should be made, assuming you can afford to hold any property, on the property you believe will add the most value at the end of the day. Positive or negative.Originally posted by mancityfan:
Utilising P&I loans for 30 years simply means that the tenants will eventually pay off ALL your debt on the property.Nope, they won’t. In the scenario I offered puduston above, the tenants would only pay some of the loan off. The ‘investor’ would have to contribute around $297,000 over 30 years, in addition to the $30,000 deposit plus purchase costs. This assumes (for ease of calculation, static interest rates, no rental voids, no rent increase). If these costs were capitalised on an interest-only loan, at the end of 30 years there would still be a $620k debt…
The only way that the tenants will eventually pay off ALL your debt is with a net positive cashflow position, using a P&I loan.
If, on the other hand they buy for the long term, surely any short term negative loss would be well and truly offset over the long term by the end value of the property.Surely? I’d say probably. But then you need to consider the ‘opportunity cost’ of that $30k deposit plus $300k worth of lost savings over 30 years. Compounding at 9% per annum, that’s around $1,800,000 after 30 years. Even at a safe 6% bank interest, it would be pushing a million dollars…
But nothing is as ‘safe as houses’ is it?F.[cowboy2]
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