You’ve probably seen ‘negative gearing’ and ‘capital gains tax’ in the news recently. That’s because they’re set to become hot topics ahead of the next federal election. Today we’ll take a look at both.
If you’re an aspiring first home buyer, negative gearing and capital gains tax (CGT) are things that you may have heard a lot about, without paying a whole lot of attention.
That’s because, well, if you don’t have an investment property yourself, who really cares?
However, Labor is proposing to reform both negative gearing and the CGT if it wins the next election.
Reforms may have a flow-on effect for the entire property market – whether you’re an aspiring first home buyer, or a budding property baron.
But before we (cautiously) tread our way into the political hoo-ha, let’s take a look at what negative gearing and CGT actually are.
What exactly is negative gearing?
Ok, rest assured it’s all much simpler than it sounds.
Gearing is when you borrow money to invest.
Negative gearing is when the rental income from your investment is less than your interest repayments and expenses.
Why on earth would you want to make a loss?
Well, negative gearing is a common technique used by property investors, who are often prepared to accept a loss to reduce their taxable personal income.
In turn, this minimises the amount of overall tax they need to pay.
For example, if you’re earning $90,000 a year, and you’re losing $10,000 on your investment property, your taxable income drops to $80,000.
Capital gains tax discount
Still with us? Great.
Ok, so we’ve established that negative gearing can help minimise your personal tax each year.
But you’re still going to need to pay tax on the profit that you make once you sell the investment property – this is called capital gains tax (CGT).
However, if the property is held for more than a year, investors may be entitled to a 50% discount on their CGT.
Who is negative gearing mainly used by?
Well, property investors first and foremost. Australia has more than one million landlords using a negative gearing strategy, according to the ABC.
The Liberal party says negative gearing benefits middle-income earners such as nurses, teachers and policemen.
However Labor disputes this, saying it’s mainly used to benefit high-income earners.
They point to Grattan Institute data which shows it’s used most by surgeons, anaesthetists and lawyers.
That all said, the option is open to all. It’s just whether or not it’s in your own best interests – and that varies according to your personal situation.
The flow-on effect
Now, earlier we mentioned that Labor was looking at reforming negative gearing and CGT, remember?
Labor wants to limit negative gearing to newly built properties and halve the CGT discount from 50% to 25%. Labor says this will help first-home buyers get a foothold in the property market.
The Liberal party, on the other hand, says these policies will crash the property market.
Now, that’s about as much as we can say about the situation without wandering too far down the political path.
Suffice to say many economists say the reforms have the potential to lower property prices. That’s good for first home buyers, not so good for (current) property investors.
Want to know more?
The above outline is only scraping the surface of negative gearing and CGT.
It’s also important to reiterate that everybody’s situation is different.
How much you earn, where your property is located, your age, and many other factors will all have a significant bearing on whether or not negative gearing would be a good fit for you.
There’s also plenty of pros and cons, not to mention risks vs reward, to weigh up. All of which, once again, will depend on your individual circumstances.
So if you’d like to find out more, get in touch. We’d love to discuss your options further with you.