Over the last two videos have taken a look at why house prices have soared in recent years and what interest rates are all about. Down this way, we have negative gearing, a term often associated with investment properties, older Australians, elections and tax. Let\’s break it down. So firstly, gearing, when you borrow money from the bank to buy an investment property, your property is geared.
When we talk about negative gearing, we\’re talking about the situation where the cost of owning an investment property, your mortgage repayments is more than the rent you\’re earning. Let\’s say the cost of paying back a mortgage on an investment property is $1,000 a week, but you\’re only getting $800 away from the family renting out the house. That means the property is negatively geared.
On the other side of the scale, if you\’re mortgage on your investment properties $1,000 a week and you\’re earning 1200 dollars a week in rent, the property is positively yet. But hang on, why would someone do negative gearing if they\’re making a loss? Two words tax deduction. Remember that $200 a week loss I mentioned that loss is an investment strategy.
The loss indicates to the Australian Taxation Office that the owner\’s taxable income is lower than their salary after deductions as they\’re making a loss on their property investment. For example, if the owner through that job makes $130,000 a year but is losing 30,000 a year from owning the rental property, that loss is subtracted from the owner\’s salary. The owner\’s taxable income that year is then brought down to $100,000.
With those deductions, the owner will pay less tax. In summary, someone who actively negatively gears expects to gain from tax benefits. But it\’s not just for a tax deduction. Buying investment property is also a much loved way to grow your wealth. Long term, when the owner eventually sells the house, its hopes that the house will go up in value over a long period of time.
This doesn\’t always happen, though, so there\’s a risk once the house is sold, hopefully at a higher price than it was bought for, the owner will make a profit minus capital gains tax. That is the investment aspect. Ultimately, the gain in property value is worth more than all the losses combined. So why does negative gearing matter to the housing market?
This is actually the simple bit. It simply means more investors are gunning for the same properties because there are some really great tax benefits on offer. When you\’re at the auction for a two bedroom apartment as a first home owner. You might be bidding against investors who are looking for negative gearing opportunities. Over the last two elections, the Labor Party has talked about a policy where the opportunity to negatively gear is only available to new properties.
This would be designed to make the housing market more accessible to us for young people. But many experts think this policy contributed to Labor\’s loss in the elections. It\’s a pretty hard plan to sell to older Australians. Coming up next, we chat to an expert about what can be done to fix the dire housing situations we\’re all facing.