Negative Gearing - The Real Deal

In the lead-up to the last Federal election, there was a lot of opinion running around about negative gearing – that it’s a tax break for the wealthy and a bunch of other baloney.

So – I am going to give you the executive summary of negative gearing.

Negative gearing is making a loss on an investment property and getting a tax deduction for the loss.

That’s it, in its basic essence.

If you lose money on a property, you are able to deduct that loss from your other income and pay tax on the residual. It’s the same as other losses. If you lost money in business one year, you are allowed to offset that against profits in the following year so that you only pay tax on your net profit position.

If you lose money on a property on the way through and then it goes up in value, you pay tax on the capital gain. The government still gets its cut – OK. If it’s in your own name, you get a capital gains tax concession for the risk you take in providing rental housing.

That’s fair.

Without property investment, new homes don’t get built to house our growing population, and the proportion of Australians that choose to rent over living in a property they own is growing – so we need investors in the market.

The majority of investment property owners in Australia own one or two properties, and they aren’t mega-wealthy.

But Why Negative Gear?

A lot of people get advised by their accountants to buy a property that is negatively geared so that they can pay less tax.

Let’s go over that one more time…

Your accountant is advising you to lose money so that the government will give you some of it back.

Actually, what the accountant is advising is that you take a tax loss now on the assumption that you will make a profit in the future, which will be treated better by capital gains tax. That is speculation, but having said that, historically it has worked in some markets.

If a financial planner told you to invest in something to lose money, he’d go to jail. Just saying.

So – here’s today’s piece of advice from me – totally unsolicited, but if you’re reading my musings, I have your implicit consent… here’s a revolutionary idea ….

Buy a property that will make you money and pay a bit more tax.

If you buy in the right area (or you can source a property at wholesale prices), it will still go up in value, and you’ll see a capital gain at the end as well.

Make some money, pay some tax – that’s OK. Don’t pay more than you need to, but I don’t want to lose money just so that I can get a little bit back on my tax return.

Particularly in today’s interest rate environment, if you buy a negatively geared property for $500k that is already losing money – say $10k per year – when interest rates go up by 2% (and they will), you will then be losing another $10,000 every year.

If you’re on the top marginal tax rate and you get $9,400 back from Mr Taxman – you’re still $10,600 out of pocket!!

You need a fair bit of capital gain to offset those type of losses over 5 years or so.

This is my mantra for buying property. It’s not really very complex…

Buy property that is at least neutrally geared (on a cash-flow basis), or preferably positively geared. Use your resources to grow your bank balance, not decrease it.

Nobody EVER got wealthy by losing money.

Greg Watson is a Credit Adviser, Mortgage Broker and MFAA member – his focus is on helping people achieve their ambitions and goals, and structuring finance properly to meet those ends – whether that be home ownership, investment, debt reduction or consolidation. Please contact us to assist you further with your finance needs.