Forums / Property Investing / General Property / Why Negative gearing will not change

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  • Profile photo of Nigel KibelNigel Kibel
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    Back in 1985 Paul Keating as Federal Treasurer decided that negative gearing was a tax for the rich so they abolished it. However, by 1987 it had been reinstated. The reason is that people stopped buying investment properties and that put a lot of pressure on the rental markets throughout Australia. The then Treasurer was pressured to bring it back but to save face brought in Capital gains Tax.
    The reasons nothing will change is because the government is not in the business of providing government housing. The government introduced negative gearing to encourage people to invest in housing to increase the size of the rental pool.

    The second issue is that many people in Australia are not going to have enough money in retirement. It does not matter how much you earn unless you can save money and the only way to do this is to invest.

    According to the federal government the minimum that an average couple can live on is around $57,000. I am not really sure how many people could maintain their lifestyle on that amount however to save enough money to generate an income of $57,000 you would need to save more than $1000 a week for the next 10 years. This is also after tax savings making it even harder.

    Now if you were to buy an investment property at around $450,000 and keep it for around 10 years and let’s be conservative and say it grows to $800,000 that’s around $350,000 in equity. Here is the exciting part if you look at negative gearing then your out of pocket expenses will only be around $25,000 that for the whole 10 years.

    So let’s put this into context you spend $25,000 to make $350,000. This is a lot easier than trying to save $1000 a week after tax for 10 years.

    Therefore, why would you not invest in property.

    Nigel Kibel | Property Know How
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    Profile photo of Ethan TimorEthan Timor
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    I see where you’re coming from. I would be interested to know how do you explain the fact that Australia is one of the only countries in the world to have negative gearing and still property investing is nonetheless common and financially rewarding in most of the countries?

    Ethan Timor | Aligned Finance Pty Ltd
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    Profile photo of Nigel KibelNigel Kibel
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    Well in the United States not only can you negative gear investment properties but you can also do the same for your principal residence. So in the USA negative gearing applies across the board.

    If negative gearing did not apply in Australia most people would not buy investment properties. The reason is that in most cities we are losing money on investments because the rent in most cases does not cover the borrowing costs. So at least negative gearing allows us to reduce the tax we earn because of the negative loss on the property.

    Now my experience is limited to Australia and the United States perhaps some of the other countries have positive cash flow property. I have a friend in the UK I will ask him about there rules.

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    Profile photo of Ethan TimorEthan Timor
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    Cheers, mate, appreciate your reply 👍😎

    My 2c are below.

    Well in the United States not only can you negative gear investment properties but you can also do the same for your principal residence. So in the USA negative gearing applies across the board.

    across the board is not accurate, IMHO.

    Wikipedia: “In principal the USA Federal tax does not allow the transfer of income streams. In general, you can only deduct expenses of renting property from your rental income, however there are exceptions to this restriction.”

    If negative gearing did not apply in Australia most people would not buy investment properties. The reason is that in most cities we are losing money on investments because the rent in most cases does not cover the borrowing costs. So at least negative gearing allows us to reduce the tax we earn because of the negative loss on the property.

    The counter claim is that without negative gearing, there would be less demand, so prices would be lower and rental yields would be higher + more people could afford buying their PPOR.

    Now my experience is limited to Australia and the United States perhaps some of the other countries have positive cash flow property. I have a friend in the UK I will ask him about there rules.

    The list of countries is a very short list and they all appear on one page on Wikipedia. It’s worth noticing the differences between Australia’s rules and the rest of those countries.

    https://en.wikipedia.org/wiki/Negative_gearing

    Ethan Timor | Aligned Finance Pty Ltd
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    Profile photo of Nigel KibelNigel Kibel
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    United States
    The United States isn’t quite so generous in its tax inducements to property investors. Investors can, however, deduct rental losses under certain circumstances. Because rental income is considered passive income, losses on rental properties can only be deducted from other forms of passive income such as gains on stocks, interest or other capital gains. Investors can deduct expenses such as depreciation, repair costs and operating expenses from their total rental income.

    The U.S. tax system does grant some major concessions, however, to owner-occupiers. Owner-occupiers can deduct the interest paid on their mortgage from their income. There are a few stipulations. For instance, the deduction is limited to interest on the mortgages for the taxpayer’s primary place of residence or a second home, and the interest is only deductible on the first $1 million of debt.

    American taxpayers also get the benefit of capital gains tax concessions for property sales. Home sellers are exempt from capital gains tax for gains of up to $250,000 for an individual or $500,000 for a married couple if the property was used as the primary place of residence for at least two of the five years preceding the date of sale.

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    Profile photo of Ethan TimorEthan Timor
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    Interesting!

    So unlike in Australia, in the USA, negative gearing is limited to offsetting income from other passive streams, not from all streams.

    Also, the system is more geared to helping OO by letting them deduct their PPOR mortgage! (Super cool for OO!)

    But CGT exception is limited to $250k when selling PPOR, not the entire gain like here.

    So, in summary, most countries don’t have negative gearing. Out of those that do, some have different systems in place than we do. This tells me that the chance of the current negative gearing rules changing (some time, some how) is not zero.

    Ethan Timor | Aligned Finance Pty Ltd
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    Profile photo of Nigel KibelNigel Kibel
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    Not only that but if you live in a house I think its 24 months out of 5 years then capital gains tax is exempt.

    If the government really want to help first home buyers why not allow them to claim a tax break on there interests payments. Unlike a large first home buyers grant it would apply to any first acquisition for a period of say 10 years. just a thought.

    I also believe that the market is mainly driven by owner occupiers not investors. By way of example consider Victoria there are around 72,000 people moving to Victoria that’s around 75,000 or 1400 a week. In fact at the end of 2015 that number was well over 90,000. Yet they are only building around 300 homes a week. Why is this the case because there is a shortage of land being released. If you limit supply it increases the cost of land. So the answer is simple. If you want to make first homes more affordable release more land. Most of the developers cannot keep up with demand.

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    Profile photo of Corey BattCorey Batt
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    I do agree that I think it’s politically difficult to remove negative gearing any time soon and this would have unintended consequences for the greater market. In the medium to long term, having gearing quarantined to the property or the asset class would be a good balance, as it would disincentivise long term negative cash flow whilst still recognising previous losses stopping an unnecessary tax burden at a later date.

    Effectively this would be the same as how companies etc run – which provides a fair balance to the business and ATO.

    Corey Batt | Precision Funding
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    Profile photo of David HallDavid Hall
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    I think it will end at some time in the future. We have a federal government that is unable to control spending and cannot get anything through the senate. We have sold most of our government owned assets, so there is very little left to sell off. We also have a rapidly aging population and a shrinking pool of tax payers.

    Negative gearing will become a luxury government cannot afford.

    I think those that all ready have an IP will be fine, but the government will either introduce a date where properties purchased after that date will not be able to negative gear, or they will introduce a cap / reduced claim %. This will be fiddled with over the years to the point where there is no discount.

    Over time you will see increased rental yields to compensate. So buy well and don’t depend on it.

    David Hall | Momentum Wealth
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    It’s interesting to see now post budget that no wholesale changes were made but the nibble at the entitlements is there for sure. They appear to be cherry picking the things that will give the most political reward (from the non investing angry hoards) by choosing to target travel entitlements after so much media on politicians travel last yr. For those of us who own property interstate, it’s a bit rude but I guess it’s not going to influence my purchase or selling decisions realistically anyway at this point.

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