What is negative gearing?
Gearing is a form of financial leverage. In real estate, when an investor borrows money to invest in an income-producing property, gearing is the money borrowed to buy this asset - usually a home loan. The income made from this investment property is either positively or negatively geared.
If the income you earn from the property is less than your interest repayments and outgoing costs, the property is negatively geared. The opposite of which is positive gearing - when the income earnt is higher than the interest repayments and outgoing costs.
Specifically, negative gearing is the practice of reducing your tax bill by offsetting the loss made on a negatively geared investment property against your income. Under the current government, Australian tax law allows property investors to claim the following, providing the property is rented or available for rent.
What can you claim?
Management and maintenance costs
- This includes interest on loans, which can generally be claimed immediately if deducted against your current year’s income.
- If your property is negatively geared, you may be able to deduct the full amount of rental expenses against and taxable income.
Borrowing expenses, depreciation and capital works spending
- Borrowing expenses include aspects such as stamp duty charged on the mortgage, mortgage broker fees and lenders insurance.
- Depreciation is the decline in value of depreciating assets such as carpet, furniture and appliances.
- Capital works expenditure includes the deductions for constructions expenditure on residential rental properties, generally spread over a period of 40 years. Deductions for constructions apply to capital works such as extensions, alterations or structural improvements.
Along with this, investors can currently claim a 50% discount on the tax payable on any capital gains accrued from the sale of a property if it was held for more than one year.
The Labor party’s proposed changes
The Labor party has proposed significant changes to property taxes if it wins next year’s election. While recent months have seen an unstable housing market in cities such as Sydney and Melbourne, it is to be seen what affect these changes would have in an already tumultuous climate.
When it comes to negative gearing, Labor plans to abolish all allowances, with the exception of new homes. Investors will not be able to use net investment losses on existing properties to offset their taxable income. Labor also propose reducing the capital gains discount from 50% to 25%.
Their primary justification for these changes is to improve supply and affordability of housing, making it considerably easier for prospective first home buyers to enter the market, having reduced competition from investors looking to snap up similar properties. Currently, the government provides $10 billion in deductions to property investors.
However, this policy was announced in 2016, with a lot having changed since its development. It remains to be seen whether the changes would actually be implemented, should the Labor party be elected to govern.
Place New Farm agent, Steve Yates shares his advice.
“With the Sydney and Melbourne housing markets experiencing a correction, there is the possibility that this policy will be re-evaluated, or the implementation time frame pushed out. Even so, if I was considering buying or selling an investment property, there is a very strong case for doing it now rather than after the election.”
If you’re looking to secure an investment property, we recommend doing it sooner rather than later. To avoid the uncertainty of these proposed changes, we recommend speaking with a Place New Farm agent today.