The Federal election is just around the corner, with potential changes to negative gearing one of the key policies that distinguishes Labor from the Coalition. While the initial announcement by the Labor party to end negative gearing was met with suspicion and even disgust in some quarters, it may not be as big a story as the media is making out. By staying up-to-date with the changes and refining your investment decisions, you can come out on top.
Negative gearing is a form of financial leverage that affects property investors in Australia. When an investor borrows money to buy a property and that property produces income in the form of rent, the property owner is able to obtain tax benefits when the investment and gross income generated by the investment is less than the cost of owning and managing the investment. The Opposition wants to scale back negative gearing, which they see as a generous tax perk which benefits property investors at the expense of first-home buyers and other owner occupiers.
According to Bill Shorten, making changes to this policy will make property more affordable for first-time buyers and boost the construction of new housing. Economists are divided on the changes, however, with some people saying an end to negative gearing may lead to falling house values and rising rents as investors flee the market. While some people may choose not to invest in property due to the lack of tax benefits, investment properties are normally positively geared after just a few years, which would make this a very short-sighted decision.
Negative gearing has a much smaller influence on successful property portfolios that many people would have you believe, with long-term growth and rental income both having a much bigger effect on your balance sheet. As rents rise over time with inflation, it normally takes 4-7 years for the income you generate from a property investment to eclipse the expenses associated with it. In fact, the toughest opponents of negative gearing believe the changes will actually lead to rising rents over time, which will make this window even shorter.
Writing off purchase costs and depreciation on capital expenses is only really an issue for the first five years, by which time the income you generate from the property will be higher than the expenses associated with it. Rather than being overly concerned with negative gearing, potential investors should be focused on creating a portfolio that makes money, after all, positively geared property is the very reason why property makes such a good investment. As soon as you're making money from your property, the changes to negative gearing will be irrelevant and may even lead to a more robust market due to the introduction of more first-home buyers.
According to Shadow treasurer Chris Bowen, “If you already use negative gearing, nothing changes. It’s not retrospective. And you can still use it for new houses... Federal Labor’s reforms to negative gearing enjoy the support of many independent economists and think tanks like the Grattan Institute and Saul Eslake as well as international economic agencies like the International Monetary Fund...The fact is, the benefits of both negative gearing and the capital gains tax discount (CGTD) are skewed towards the wealthy, with the Grattan Institute estimating almost 70 per cent of the benefit of the CGTD accrues to the top 10 per cent of income earners.”