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Many investors are dependent upon the tax advantages gained from negative gearing to sustain their investment properties - but is it really worth it?
In, as in most of Australia, when an investment property is highly leveraged, it initially costs more for interest and expenses every month than the rental revenue received. Any shortfall in revenue comes out of the investor’s pocket.
Negative Gearing: How It Works
Gearing is computed by adding loan interest and expenses, such as maintenance, property management and repairs, and comparing it to the amount of revenue the property brings in through rental payments. When interest and expenses are less than revenue and the property has a positive cash flow, it is said to be positively geared.
However, when interest and expenses are greater than revenues generated, the property is said to be negatively geared. Up to now, Australians have been able to deduct the amount of negative gearing from their incomes for tax purposes. This saves a lot of money for some and is the difference between being able to invest in real estate and not being able to afford investment properties.
By the Numbers
The Sydney Morning Herald recently published an article on negative gearing. According to the article, Australians reduce their taxes by as much as $35 billion a year with property-related deductions. This includes investors and homeowners.
While they didn’t have access to current stats for investors, they did have access to the year 2010-2011, in which property investors were able to claim a total of $13.2 billion in losses.
1.2 million Australians are currently estimated to claim negative gearing against their taxes, with an average claim of $10,950. However, when income reached the $180,000 threshold, the average claim rose to $23,800.
The Real Estate Institute of Australia (REIA) believes that the Government is seriously considering lowering or eliminating the tax break for negative gearing. As early as 2010, the Rudd Government commissioned a study and released a report which recommended eliminating negative gearing tax breaks and “replacing” them with savings discounts.
The REIA is rightfully up in arms over the possibility of eliminating the advantages of negative gearing, fearing that many investors who depend upon negative gearing for sustainability will be forced to raise rents by at least 4%. The REIA takes issue with the fact that changing the law concerning negative gearing would subject real estate assets to a more severe set of rules than other types of assets, putting real estate investors at a disadvantage.
We provide all of our clients with our proprietary “Investment Property Success Plan” which is based on their goals and resources. One of the things that we feel is important is to avoid negative gearing whenever possible.
When negative gearing property you are still losing money, which cuts into the money you could be paying off personal debt or putting towards savings.
We feel that you must do your due diligence when you invest and have a plan for properties to become positive geared after no more than 2 years. To speed this up you can use more active strategies such as development to create a positive cash flow.
At this point, a solid investment plan does not include long term negative gearing.
About Jarrad Mahon
Jarrad is the director of Investors Edge Real Estate.
Jarrad thrives on helping hundreds of investors every year formulate a clear plan to get the best returns from their Perth property. This requires a carefully thought out and innovative approach to understand your situation and help you to make the right move at the right time.
His renowned personalised "Property Success Plan" takes you step by step through how to make thousands of extra dollars and avoid the costly mistakes that Jarrad has learnt the hard way by investing himself all around Australia.
Over the last five years he has used his engineering background to build and refine a unique property management, sales & investing process that is sure to impress while getting you real results.
A sales and marketing expert, Jarrad combines the latest technology and cutting edge sales strategies to sell homes across the whole of Perth metro area.
Negative gearing occurs when the rental income of a property is not enough to cover the total costs of managing the rental and re-paying the interest portion of the loan.