What's Negative Gearing?
For all the talk about negative gearing in the news, surprisingly few people really get what it’s all about, other than the fact it has something to do with property. As your local property experts, we want you to have all the facts, which is why today we’re giving you everything you need to know.
Gearing is just another way to say you’ve taken a loan to make an investment. Unlike a loan to buy a home, with an investment you’re looking to get a regular income out of it, so you have three types of gearing: Positive Gearing, where the money you get is more than the expenses you pay; Neutral Gearing, where the money you get is equal to the expenses you pay, and; Negative Gearing, where the money you get is less than the expenses you pay.
Why Be Negative?
There’s two reasons to go negative: to minimise your taxes, and to sell later for a profit. For a (very) simplified example, if you take out a loan to buy a property for $500,000 and your expenses and loan interest are $50,000 a year, if you only receive $30,000 a year in rent, you’ll make a $20,000 loss. However, this can reduce your overall taxable income, and you could pay less tax.
Also, if you sell the property for $600,000 next year, you’ll still have made an $80,000 overall profit.
What’s the Catch?
The problem is that it’s not always as simple as the example we just gave, and if you don’t end up selling for a profit you’ll be making a loss overall, even with the tax benefits. Also, the Federal Government is worried about some investors not even trying to rent out a property, leading to rental affordability issues as new homes are built just to sit empty for a few years.
However, with CoreLogic finding nearly 70% of negative gearers have a taxable income of under $80,000 per year, most people simply can’t afford the short-term expense of not renting at all.
If you’re thinking of investing, it’s important to look at the market to see what areas are growing, and what historical trends can show you to expect. At LJ Hooker Sunnybank Hills, we can give you a free, in-depth analysis of any suburb in our area, so talk to us today to see what’s right for you.
MoneySmart – Australian Securities & Investments Commission, 2017, Negative and Positive Gearing
Koulizos, P. (2016). How Negative Gearing Works
Millar, S. (2016). Q&A: Is Negative Gearing Good or Bad?
Commbank, 2017, What Is Negative Gearing?
ABC News, 2016, Negative Gearing: What You Can and Can't Claim