WHAT would really happen if we got rid of negative gearing?

The issue is a hot topic and has been blamed for everything from soaring house prices to stopping first home buyers from entering the market.

Property analyst Simon Pressley of Propertyology reckons getting rid of negative gearing would be “political suicide” and end up costing the government more in the long run through taxes it would miss out on.

So what is negative gearing?

Negative gearing is a form of financial leverage where the gross income you earn from an investment property is less than the cost of owning and managing the property, this includes interest on your mortgage on the property. Those losses are then tax-deductible against other taxable personal income.

So basically if your property costs you more than it makes you can claim a tax deduction.

Mr Pressley said very few people understood what it was and its implications.

“There’s a sad segment amongst Australians who believe that negative gearing is some kind of hand out to the rich,’’ he said.

“Little do they know that there are approximately 1.9 million Australian property investors and more than 70 per cent of them only own one investment property and have a taxable income of less than $80,000.’’

He said many bought investment properties to help fund their retirement so as not to rely on a government pension.

Property analyst Simon Pressley said abolishing negative gearing could mean fewer property transactions.

Nick Lockhart, managing director of MRD Partners, said there were benefits and disadvantages to using negative gearing.

The pros are:

Positive cash flow: After tax and adding non-tax deductions to rental income, a negatively geared property may actually produce positive cash flow.

Opportunity for the ordinary guy: Negative gearing bridges the ‘affordability gap’ to allow low to middle income earners to invest in property.

Reduce your taxes: It allows investors to deduct the negative amount from their taxes at their top marginal tax rate. The higher the top marginal tax rate the greater the tax benefits.

Self-imposed financial discipline: Negative gearing could be described as a type of forced savings. “If I am committed to putting $50 a week, for example, towards holding an investment property, that’s a good thing.’’

It’s only temporary: Over time as rents increase what was negative cash flow will become positive and eventually the investment property will be positively geared.

The cons are:

Taking from one’s cash flow: Unless the tax deductions exceed the losses on a negatively geared property, an investor must still make up for any cash flow shortfall.

Can cause hardship: Property investing is a medium to long term thing and if your situation changes you may find yourself in difficulty; sometimes being forced to sell a property at a loss.

Underperforming Investment: Unfortunately, markets can be unpredictable at times. The GFC had a negative effect on both rents and prices in most places around the country, some of which have taken a long time to recover.

Sleep at night factor: Taking on new debt can cause sleepless nights.

Additional responsibilities: As an investor you have new responsibilities and obligations. You have to deal with a property manager, handle bank accounts and have a more complicated tax return.

Getting rid of negative gearing may end up costing the government more in the long run through lost property transaction revenue. 

Mr Pressley said if we got rid of negative gearing there would be fewer property transactions every year and the government would lose a lot of revenue from stamp duties, infrastructure charges, land tax, construction industry payroll taxes, and more as a result.

He said it would be a disincentive to buying and holding property.

Mr Pressley said other factors affected property values more than negative gearing.

“The factors which affect property values the most are related to the general economy, employment, and credit policies, not tax policies.’’

“Negative gearing has been in place for generations and it is no more responsible for Sydney’s property price growth in 2013-14 than it was for its flatline performance from 2001 to 2008.’’

Source: news.com.au