Thinking about renting out my townhouse. There would be a $150 shortfall and just wondering how negative gearing works in relation to your taxable income.

Just wondering the pro's n con's of it all.

Cheers

Basically any losses are tax deductable, ie: reduces your taxable income.

Depending on what tax bracket you are in, and where you are in the bracket, as to how much of an advantage you will get from it.

It can get pretty complex so best get some professional advice before you do.

Pros: Costello wants to get rid of it.

Oh... but I guess that would be a con for you.

it will be less appealing at the end of this month.

yeah i heard they were gonna change it, or were thinking of changing it. its it confirmed or just talk at moment? and isn't it only if u own a few?

pro': your getting a tiny tax break

con: your losing money even with the lower tax

Costello has definitely made it clear he *wants* to get rid of it.

It was originally introduced to provide a boost to the construction industry if I remember correctly, which it obviously has so I suppose it's served its purpose.

Yeah. It was originally brought in to get us out of a recession - they're scared getting rid of it might cause another though.

We now have the opposite problem though - too many people owning multiple homes are drying up the property market and having their properties paid for by those forced to live in rental properties, because they can't afford to buy artificially inflated properties.

Removing negative gearing will make it unaffordable for many people renting out their properties, so there'll be a larger supply of properties, meaning a drop in property prices.

Simple really :D

So there are less rentals, driving those prices up?

they won't get rid of it. last time they did rents were driven up and this pissed people off. it ended up being abolished after 2 years. the best way to tackle high property prices would be to increase the supply. councils are flushed with cash from higher property prices so should be able to afford to rezone lots of land higher density.

last edited by hast at 23:06:23 04/Jun/06

negative gearing is premised on capital growth of your asset while you incure operating expenses in order to defer a tax liability in the present tax year until the asset is disposed (on which capital gains tax will ultimately be paid). this strategy is most effectively used in real estate which has strong growth potential.

as brisbane residential real estate is not set to go anywhere for the next 6-8 years (the brisbane market has peaked), i woudn't be buying anything - especially residential - for the express purpose of negative gearing.

on the other hand it sounds like you already have this townhouse as your principal place of residence and therefore it is already an asset under your control. would you buy another residence? in which cae you face an interesting dilemma because you can rent a principal place of residence (PPR) for a particular period of time before losing the CGT PPR exemption under the income tax assessment act.

basically you have to ask yourself

1. will you be achieving at least $10k capital growth in your asset per year you rent it to cover the costs of your shortfall, and

2. do you have the spare cashflow to presently absorb the shortfall?

Property investing is fun!

Dont quote me but i seem to remember that it "negative gearing" was brought in to help provide more houses for rent to those who couldnt afford it. It was noted that teh government could not possibly provide enough government housing or housing assistance to cover teh demand with out this initiative.

Recently (in the last 20 years, the actual date escapes me) Labour (being the friend of the working class (hahahaahaha/cough) decided to remove the negative gearing system since they believed that it only benefited the middle / upper classes.

And of course as someone else has already mentioned, rents went through the roof and the same people that the same people they were meant to be helping (ie the renters) were now SERIOUSLY disadvantaged.

Needless to say, negative gearing was reintroduced so fast that it was if it never left :P

i thought "negative gearing" would be the natural state of the law. you are running a business at an operating loss so that should reduce your taxable income. of course you are making a capital gain but that is taxed separately when you sell the asset so shouldn't increase your taxable income.

Of course, yes, you raise a valid point that there's less rental properties so it puts those people in a spot of bother... but that doesn't mean they couldn't make say the 30k-50k bracket not have to pay tax on that income paid for rent. That would give them an extra 6k a year to play with.

Of course, yes, you raise a valid point that there's less rental properties so it puts those people in a spot of bother... but that doesn't mean they couldn't make say the 30k-50k bracket not have to pay tax on that income paid for rent. That would give them an extra 6k a year to play with.

But that would just keep demand the same without increasing supply. That could just push rental prices up further as people have more money to allocate towards rent to compete with eachother for properties.

To me it seems that negative gearing in general was a fairly short sighted solution. It's left us with a cycle we can't get out of that's driving property prices up and out of the reach of young people.

Basically negative gearing is a government subsidy on rental prices paid for by tax-payers. Allowing owners to offset losses as tax deductions causes them to charge lower rental prices (or not increase them) as they are more concerned with capital growth. This causes rental prices to be artificially lower than if left to the market.

Negative gearing caused a once off increase in the demand for property. If you took negative gearing away it would cause a once off decrease in housing prices due to increased supply and a once off increase in rental prices due to decreased supply. Basically it wouldn't be feasible for many people currently negatively gearing rental properties to keep them, so many rental properties would be placed on the market to be sold, making it better for people looking to buy and worse for people looking to rent.

This is would most probably be a very bad thing. Keating tried it in 1985, it caused construction for the rental market to close down virtually overnight and the stock of existing rental dwellings plummited as investors dumped their properties and rents went through the roof. It caused such a s***storm that labor ended up having to bring it back 2 years later. Vacancy rates for rental properties in all capital cities are less than 3%. That is very low. This is clear when you see that rental prices are rising by far more than CPI in capital cities for all types of housing/units. Taking negative gearing away would only worsen this, causing rental prices to soar and supply to disappear.

I don't think negative gearing is necessarily a good policy, but without serious tax reform taking it away would be rediculously stupid in the foreseeable future.

edited for clarity

last edited by taggs at 22:22:53 05/Jun/06

Chakas, yep, perhaps.

So basically, the only way to stop these rich people owning tons of homes comes back to the idea I'd want to see implemented:

Property purchases/ownerships of more than one incur a tax of 100% of the property value already owned.

Eg, you already own one property valued at 300k, you buy another one at 350k - you pay 300k tax on property #2. You buy a third at 500k, you pay 650k tax on property #3 :)

Completely reams the rich, helps the poor :)

last edited by Raven at 22:27:56 05/Jun/06

That would never work. If you overtax the rich you just won't have any rich people left :)

and for the record i dont think its the "rich" people who own investment property (though i guess u should qualify what u think is "rich")

IMO its usually people in their 40s+ who have paid off their own home (or nearly) and are looking to create some retirement wealth separate to or additional to their superannuation

The so-called "rich" people are busy buying beach side properties, shares, commercial property, indexed funds etc :)

Right now though the sharemarket is probably a better investment though as always, property is perceived as a "safe" investment which is what attracts the "mum and dad" negative gearing investors.

(remember u can negative gear ur shares too :))