What the Heck Is Negative Gearing and Why Should I Care?

Unless you have had absolutely zero interaction with any kind of news outlet in the country, you would have heard a lot of talk about negative gearing and proposed government changes to it.

So what is it all about?

Negative gearing is a tax break for investors that borrow money to invest in income generating assets, typically shares or property. It applies when the costs of owning an asset are higher than the income it generates.

So an investment property is negatively geared if its total mortgage interest, property management fees, maintenance costs and other related expenses are greater than the rental income.

But how does making a loss on an investment property actually help anyone? Let me explain, friend.

The key is you can offset losses from a negatively geared investment property against other income, meaning you’ll pay less tax. High income earners in particular appreciate this as they pay the highest marginal tax rates, and therefore get the most benefit when their taxable income is reduced.

But wait a second… even with a tax break you’re still actually making a loss right?

Correct. Negative gearing is not a license to make money. Investors are betting that their loss-making property will increase in value over time enough to cover the shortfall when they sell it.

So why is everyone up in arms about this at the moment and why should I give a bloody heck? Jeez, why so many questions?

 

Well, opposition leader Bill Shorten has proposed to limit negative gearing to new dwellings only, starting in 2017.

The suggestion has seen a mixed response, with many property experts slamming the idea, claiming that the changes will push property owners to raise rents which could drive house prices up even further.

On the other side of the coin, when negative gearing was removed in the mid 80’s rents didn’t go up in the spectacular fashion that Joe Hockey suggested. The property lobby are also claiming that ‘mum and dad’ investors will be hurt the most, but other experts are saying that it’s just not true.

Whether you buy into either of those claims or not, the statistics provided by the RBA state that it’s a tactic used by wealthier older people, AKA, The Baby Boomers, AKA, the generation that likes to bad mouth Gen Y for being “slackers” without acknowledging the fact that they had it easy in terms of accumulating wealth. But now I’m just ranting.

Like any big topic in the political spotlight, it can be confusing and leave you asking yourself if it’s worth giving a shit about.

At the end of the day, whether it effects you directly or not, you should arm yourself with enough knowledge about these topics so that when it comes time to decide which middle-aged white man should run the country, you can choose the one that’s in the country’s best interests.

Not this one.

Please note that this article is not an in depth analysis of negative gearing, it is simply a broad explainer of the principle. If you are interested in learning more, I encourage you to continue researching the topic.

Note: Corrections have been made to the original article.

And if you’re keen to get on board with all the action, you can see what rate you’ll get on a mortgage by using the calculator below.

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