Negative gearing: For some people, those are divisive words. But what does this system actually entail - is it going to work for your real estate?
Buying real estate tends to be a hot topic for debate in and around government. Open the newspaper on any given day, and you're likely to see someone arguing for or against the property market like their life depended on it. If you have an eye on this part of the news, then there's no doubt you will have seen negative gearing mentioned more than a few times.
But there is a big difference between recognising something and understanding it. So, let's peer a little closer at negative gearing so you can get a handle on the basics!
How does negative gearing work for people buying property?
What is negative gearing?
To best understand negative gearing, we also need to talk about what it means to have a positive cash flow property. This is when you buy an investment property, rent it out, and the rental income is more than all your expenses for that property.
Negative gearing is when the costs outweigh the income.
On the other hand, negative gearing is when the costs outweigh the income. It's common in many parts of the country at the moment, as property costs have risen so much while rents have not kept pace. It means you are losing money in the short term on your rental property.
So if it's burning a hole in your pocket, why are bodies like the Real Estate Institute of Australia (REIA) fighting so hard to keep it exactly as it is?
The benefits of negative gearing
When your investment property runs at a loss, it may seem like an inefficient way to manage such an important (and expensive) asset. However, as the Australian Taxation Office points out, there is actually quite a large benefit to this.
"You may be able to claim a deduction for the full amount of rental expenses against your rental and other income (such as salary, wages or business income) when you complete your tax return for the relevant income year," the ATO states.
On top of this, in some cases you can carry over the losses to the next financial year. You are effectively reducing how much income you are taxed on, giving you more in your pocket when you file your returns.
Take the Canberra real estate market , for example. CoreLogic RP Data's monthly indices to June 30 show the median value of a home was $642,970. If you bought at this level with a 20 per cent deposit, one calculator shows your weekly repayments would be $660. However, SQM Research figures show median asking rents are well below this ($524.30 for houses, $408.30 for units).
Obviously, this is a general overview and does not account for interest rates or many other variables – but it gives you an idea of how commonplace negative gearing can be, and what can be gained.
The tax benefits of negative gearing make it worth the trouble for many Australians.
What to watch out for with negative gearing
While the tax benefits of negative gearing are appetising for many house hunters, it's important to remember that you are still managing an investment property at a loss. As such, you need to make sure it is actually financially viable. It isn't specifically the domain of the rich though – the Property Council of Australia reported that 58 per cent of those claiming these losses in 2012-2013 were on incomes of less than $80,000.
You need to pick the right property for your finances, no matter how you want to structure it for your tax. This can include the type of home it is, what kind of home loan you want, whether you wish to focus on capital gains and how long you'll stick around for are just the tip of the iceberg.
If you want more tips on finding a home that suits you, get in touch with the team at Peter Blackshaw Real Estate.