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How negative gearing works for investors and renters
How negative gearing works for investors and renters

Negative gearing can be a confusing topic, especially when politicians and the media get involved!

Kate breaks down negative gearing and explains how it can benefit investors and renters.

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Hello everybody out there how are you all doing? I’m Kate Hill bringing you the best and unbiased honest content on property along with fantastic hints and tips. Stay tuned today for a very short update on the old negative gearing debate.

[Music] In a move that surprises absolutely no one, the Australian Greens have started kicking around the negative gearing football again in a misguided attempt to win votes with their constituents. They did the same thing last year when they tried to strong-arm the federal government into somehow instigating rental freezes even though the government has no jurisdiction in state-based residential tenancy matters. They didn’t win that fight either.

Now I am not here to disparage or promote any particular political party honestly, but I do want to explain what negative gearing is and what it isn’t, and also why fiddling with this very long held taxation policy will could be very bad news for renters in the long run. So first and foremost, negative gearing is not a property investment strategy. It’s merely a tax outcome. Now sure some investors do record net rental losses during the first couple of years of investment property ownership which is commonly referred to as negative gearing.

However negative gearing is not only a taxation policy that applies to income earning assets such as property, it also applies to businesses and shares. Plus, it should never obviously be the only reason

that someone becomes a property investor. But that aside, and that’s because it is capital growth that will make the biggest difference to your financial future not the ability to offset rental losses against income earned for those first few years.

Now that said, it is fair and reasonable that someone who is investing hundreds of thousands of dollars in an asset that provides housing for 30% of Australia’s population that the government won’t do is able to claim legitimate expenses involved in owning that property. What that also does is increase your cash flow of course in the first few years which is often when those expenses associated with an investment property can be higher than the income from the rent that is earned now over time as the rent increases, the loans reduce.

The property becomes cash flow positive or even positively geared which means that investors start paying tax on this additional income back to the federal government. But that is usually not something that is given much exposure to by mainstream media or left-wing politicians because they don’t seem to understand that. Negative gearing last became a political football before the 2019 federal election and it is now widely accepted that its scrapping negative gearing policy lost the Australian Labor party that particular election.

However, it also scared plenty of potential and current investors who either didn’t enter the market or exited it even though those policies are often grandfathered, so those people who already own an asset would not be affected by a change in policy. This fundamentally contributed to the rental crisis that we are now experiencing, so thanks for that.

According to brand new research from the Property Investment Professionals of Australia or PIPA, tampering with negative gearing and capital gains tax concessions could cost the federal government up to $58 billion over just 10 years and gut the already stretched rental market of supply. Modeling by PIPA shows that Labor’s forementioned and failed previous policy of limiting negative gear into brand new homes, cutting the capital gains tax discount back in 2019 would have huge ramifications if applied today as well as driving investors out of the market and in droves, that kind of drastic reform by the government would leave a gaping hole in the federal budget.

The federal government earns billions of dollars in tax from capital gains tax every year with the ATO reporting some $26.4 billion in individual real estate capital gains in the 2020-21 financial year for example. And that isn’t even the worst-case scenario given that 38% of investors indicated in the 2023 PIPA investor sentiment survey that they probably would sell up in the coming year because recent tax and tenancy reforms made investing in property an unattractive proposition.

If Anthony Albanesi suddenly adopts a draconian policy like the one that Labor took to two separate elections I have no doubt property investors will be seriously discouraged from buying property said the chair of PIPA Nicola McDougall in that research.

When it last proposed proposed these drastic measures Labor claimed it would incentivise landlords to buy new homes stimulating supply but our research shows that 93% of investors buy established dwellings not new ones, and who will supply all those new dwellings required to house Australians who rent? Not everybody wants to buy property.

Our lifestyles are becoming more and more flexible. People work from home, they move home more frequently, they travel. They don’t necessarily want to be tied down, they rent-vest. The government’s belief that fewer investors in the market would mean more first home buyers is also deeply flawed, with the number one barrier to home ownership for young Australians being the ability to save for the stamp duty.

But with all this noise going on about negative gearing it is vital to recognise that this time it would be highly unlikely that the federal government would tinker with a policy that previously lost them probably several elections but certainly that last one. It would also deepen and prolong the current rental crisis around the nation.

But hey let’s not let politics get in the way of solving an actual problem. There’s also a misguided belief out there that this tax policy drives up property prices. It just doesn’t. I’m going to make a separate video on why that is absolutely not the case and why there’s this myth around the fact that investors buying property drives up property prices. It’s just not the case. Investors are not that stupid, let me reassure you there.

I will keep you posted on all things property from around Australia as the year progresses. Don’t forget to hit that like and subscribe button. Hit unlike if you are vehemently against the negative gearing tax policy but if you are enjoying all the free content and you’re finding it useful then great and I will see you again really soon.


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