Explain Negative Gearing to Me Like I'm Stupid

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    Quantumcat on 12/01/2023 - 23:52

    +2

    Go straight to jail, do not pass Go, do not collect $200 😛

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    HeWhoKnows on 22/01/2023 - 21:57

    Any many do

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  Muzeeb on 12/01/2023 - 22:12

  Like I'm Stupid

  ELI5 - explain like I'm 5

  ELIS - explain like I'm stupid

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  foxmulder on 12/01/2023 - 23:04

  See if this video helps?

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  Stopback on 12/01/2023 - 23:46

  Trusts are worse

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    spaceflight on 14/01/2023 - 19:52

    Not if you trust them

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  fredblogs on 13/01/2023 - 00:08

  +2

  ELI5: Say you lose 20k on a property per year. Negative gearing allows you to deduct that loss against your salary, reducing your tax by say 10k.
  So now your loss is only 10k per year, not 20k.

  When is it ever good to lose 10k per year? Only when the property value is going up by more than 10k.
  Of course, you have to pay tax when you sell the property, so let's say the value has to go up by 13k to break even.

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    Thrawn on 13/01/2023 - 09:10

    And another point.. over time rent rises. A negatively geared property would likely end up neutral after a decade (assuming interest rates are stable). And after that it'd become positively geared.

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  tsunamisurfer on 13/01/2023 - 01:01

  -2

  It's scary just how clueless some people are regarding matters investment / taxation and politics.

  Negative Gearing and things like the CGT discount have become the unfortunate punching bags in the discussion about home affordability.

  I am an investor and I have and never will use NG. I do not want to spend $1 just to claw back 40c at tax time even if its against my primary (salary) income. Put simply I do not want to lose 60c, I want to make money.

  NG only works when people are able to cop a loss then claim tax deductions to soften the blow and wait for the market to grow and eventually claw back the losses via big capital gains. As we are seeing now, capital growth is not perpetual nor is it guaranteed. You are a mug if you lose 60c in the dollar now THEN cop another 5% loss in the value of the property.

  It can work great but only under certain circumstances which are not guaranteed.

  In the 80's some time, the government got rid of NG, the results were so horrible that they brought it right back within the year.

  In the Federal election before last, Labor proposed to TWEAK NG, that policy was so abhored that they lost against ScoMo.

  Voters do not want to get rid of NG.

  Then there are some very sad notions about NG. See below as an example.

  Basically negative gearing has become a tax dodge vehicle that costs the Australian taxpayer (you and me) billions of dollars a year, subsidising an investor's (not a very good one) gambling habit as they hold out

  NG doesn't cost the Australian taxpayer a cent, the investor is reducing the amount they contribute to the coffers, they have taken exactly ZERO. Those on Welfare are the ones taking money from the coffers that Taxpayers fund. There is the real problem.

  To further compound the affordability debate people also point the finger at the 50% CGT discount as some sort of rort. But they are ignorabt of the fact that the CGT discount is a vastly simplified method to its predecessor indexation where you have to look up indexation tables post 83 to work out the indexed cost base. It was horrible, I recall having to lug around the Master Tax Guide plus the volumes of the ITAA 1997. To argue the CGT discount is wrong is basically saying you bought this property in 1985 for $100k and now its worth $1m, let's tax them on 900k taxable income.

  There is nothing wrong with NG or CGT discount (and I hate NG), but people see the rich getting fatter then get triggered, all the while ignoring other policies like the FHOG and other demand side policies that raised prices just as much.

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    trapper on 13/01/2023 - 01:15

    +2

    I am an investor and I have and never will use NG. I do not want to spend $1 just to claw back 40c at tax time

    You can claim losses that are not actual expenses though, such as the depreciation of a building.

    So you can still get your 40c back at tax time without having to actually spend anything.

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    ForkSnorter on 13/01/2023 - 09:24

    +2

    In the 80's some time, the government got rid of NG, the results were so horrible that they brought it right back within the year.

    This is a myth promoted by the Liberal party, it has been debunked several times simply by looking at the data.

    That's the thing about conservatives. They're not interested in the truth. They're only interested in myths or the small portion of the data that can be manipulated to make it look like it supports their existing beliefs.

    Those on Welfare are the ones taking money from the coffers that Taxpayers fund. There is the real problem.

    Poor people usually have to spend every cent they have. That means that every cent given to poor people comes back into the economy pretty much immediately. This money supports jobs, and ends up back in the hands of taxpayers.

    There is nothing wrong with NG or CGT discount (and I hate NG), but people see the rich getting fatter then get triggered

    The reality is that when you look at the data, the overwhelming majority of the money made via NG or CGT discount ends up in the hand of the most wealthy people in Australia. These policies are just another way of increasing inequality and incentivizing exaggerated demand in the property market, thereby pushing up prices and forcing people on median incomes to struggle.

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  ForkSnorter on 13/01/2023 - 06:49

  As I understand it, it was originally designed… to increase supply

  LOL

  Did you mean decrease supply? Because that’s what it does. And it drives up prices. And makes wealthy people wealthier.

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    CrowReally on 13/01/2023 - 09:05

    +2

    It was an incentive for them to enter the market, which increases demand, which then increases supply.

    It doesn't last forever - you end up with cities getting full and supply doesn't keep up with demand, which is where we are now.

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  netjock on 13/01/2023 - 08:59

  +1

  If you don't get it you shouldn't get into it.

  Unfortunately a lot of people think they get it but they actually don't.

  Basically: you can not pay income tax on interest paid to the bank, claim it as an expense.

  What people don't get is cashflow becomes your problem.

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  star-ggg on 13/01/2023 - 09:48

  +2

  Basically, NG is a rort because the govt/taxpayer is directly helping investors fund their cost of holding an asset. Just because an asset is cashflow negative dosen't mean it's an investment loss.

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    SlickMick on 13/01/2023 - 10:27

    Any investment is entitled to have an income tax deduction for expenses.
    Without negative gearing, an individual investor cannot pool their investment income and expenses with their wages income and expenses.
    They would be forced to setup a company, and/ or have sufficient positively-geared properties to offset the negatively geared.

    I don't even know why it is such a hot topic. But because it is, other legitimate deductions like depreciation and travel are being deducted.
    I wish property investors made as much noise as their detractors.

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      star-ggg on 13/01/2023 - 10:43

      +2

      What do you mean by "entitled"? Investment and wage income and expenses should be siloed into separate categories. They are different methods of earning income. Investment is by taking on risk, wages is by selling labor. With NG, the question is why should taxpayers be forced to subsidise the cost of investors taking on risk?

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        SlickMick on 13/01/2023 - 10:53

        Entitled because tax is always on net income, not gross. Subtracting expenses before calculating tax has always been and will always be a thing.

        Some obviously share you view of siloing different forms of income. <sigh>
        This is the first time I've heard someone try to say taxation should be based on risk.

        Like I said, investors will never miss out on their legitimate deductions, they'll just have to restructure if the NG haters get their way.

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          star-ggg on 13/01/2023 - 11:50

          +1

          @SlickMick: Yes, investors are entitled to deduct expenses- when their investment gains are realised. When calculating the ROI of an asset, you take into account the cost of carrying that asset.

          I never said taxation should be based on risk. Taxation should be siloed based on the type of economic capital that was used to generate the income being taxed. Wages is income generated from human/labor capital, investment is from financial capital.

          If NG is fundamentally sound from an economic and accounting perspective, why do no other countries have it?

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            duchy on 14/01/2023 - 23:39

            @star-ggg: Australia, Japan, and New Zealand have NG. Other countries have NG with restrictions (for new properties only for example).

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  born2reign on 13/01/2023 - 10:54

  +4

  Negative gearing is one of the most misunderstood tax policies (LMI is also wildly misunderstood)….

  Just reading through all the comments, not one person has been able to explain to OP "Explain Negative Gearing to Me Like I'm Stupid"

  Instead all the property perma-bears have come out in full flight together….

  Negative gearing is not restricted to property investment. The concept also applies to running a business/company, or using debt to purchase shares.

  The other factor that hasn't been mentioned yet, is that property investors fill a massive hole for the government which is providing rental accommodation to renters.

  The government has flopped time after time trying to provide rental accommodation and they simply cannot manage it well, or afford to do so. Hence there are some tax breaks to incentivize property investors to do the heavy lifting for them.

  If you think the rental market is bad now (and it is with sub 1% vacancy rates in many, many markets across Australia). Imagine how much worse it would be if property investors quit / sold up in masses. Yes you property bears might get a temporary hard on, but it would be a disaster for the ~ 30% rental pool with expenses going through the (no pun intended) roof.

  If I get time later this afternoon OP, I'll explain negative gearing to you like you're dumb, but in the meantime you're going to have to watch the property permabears politically derail yet another property thread with mostly nonsense.

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    greatlamp on 14/01/2023 - 15:56

    providing rental accommodation to renters.

    The vast majority of renters cannot afford to purchase their own place. If prices weren't so high, they wouldn't be renting.

    People are arguing for negative gearing to be repealed today, not 30 years ago, so you need to consider the situation as it is today. Negative gearing isn't helping house people, it's keeping people from housing themselves

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      foursaken on 16/01/2023 - 14:57

      Complain to the government, not born2reign. He was only stating one of the positives of NG, and your "let's talk about today" comment is irrelevant. NG was introduced some time ago when property was NOT an investment class, and the government needed to expand rental stock. There's some debate as to how effective NG was at that, but you cannot argue that it had no effect on rental availabilities.

      This was all prior to the idiotic "housing boom" where a bunch of boneheads with no morals decided that property isn't a basic commodity that everyone should have access to, and made TV shows like "The Block".

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        greatlamp on 16/01/2023 - 17:21

        Complain to the government, not born2reign.

        Why is my comment irrelevant. Claiming that NG has a benefit to renters is asinine at this point. I have explained why in detail in another comment.

        That is the point of a public forum, to have discussion with the community. I don't see why I don't deserve to share my opinion

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          foursaken on 17/01/2023 - 08:47

          +1

          @greatlamp: As I said, NG was introduced some time ago when property was NOT an investment class, and the government needed to expand rental stock. There's some debate as to how effective NG was at that, but you cannot argue that it had no effect on rental availabilities. In 2023, I agree with you, it is grossly longer functional, BUT still you cannot argue that it has no effect on rental availabilities. I'm not saying you cannot share your opinion, and I partially agree with you, but it's too simplistic to say the NG is the problem with the housing market. Realistically, it should have been scrapped a decade ago, and the housing market reformed (not difficult to see what works, just look at Europe).

          I think we can both agree on the fact that you and I see this as a MORAL issue - Housing MUST be available to ALL Australians.

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    foursaken on 16/01/2023 - 14:52

    Another important factor with NG - there are VERY few (legal) ways to reduce PAYG tax.

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  Donaldhump on 13/01/2023 - 11:00

  spend $1 to get 37c back. Spend in the form of loan and claim a s a tax deuction, in the hope the asset you buy returns / gains more in the long run.

  All good until you lose your job and have nothing to claim against

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    born2reign on 13/01/2023 - 15:34

    If you lose your job and can't find another one within ~6 months (the amount of time you would need to be completely unemployed and have a useless taxable income to negatively gear to the point where it doesn't make sense), then you have much bigger problems in life then your negatively geared investment property IMO….

    timing of the (hypothetical) job loss also dictates how this would play out, because if you were unemployed for 6 months from July to December and your taxable income for the next financial year dropped from 100k to 50k, then you could only negative gear 5k @ 34.5% tax refund (32.5% tax rate + medicare levy), and if you have another 15k to negative gear after that, then it would be at the much less desirable 21% rate (19% + medicare levy)…

    However if you were unemployed in say June and July and you only "lost" 1 month of income in each financial year, the result would probably be a blip in the radar with respect to how much tax return someone would get

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      Donaldhump on 13/01/2023 - 16:49

      noit neccissarily

      if someone has NGing on a few properties, but ample assets to survive, being unemployed is not a concern other than the NG now sucks,

      so NGing i think is good if u hedge ur bets on heft CGs but how do u know ur employment income is 4 ever, so also risky

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  El-Rhi on 13/01/2023 - 11:33

  Think of any investment (property, shares etc.) with its own P&L. You have the income derived from the investment then the expenses incurred (including any non-cash depreciation in the case of physical assets). If your total expense is more than the income then you can claim this ‘loss’ as a tax deduction on other taxable income you’ve earned, thereby reducing your overall taxable income.

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  Mark1159 on 13/01/2023 - 16:07

  Do you only pay CGT on an Investment property when it is DISPOSED of.
  If I die and my paid off (previously negatively geared investment property) PASSES to my son - no CGT is payable? Is that right?
  He could BEQUEATH it to his heir, CGT free? (if law doesn’t change)
  My son could live rent free, in an unencumbered property and buy another investment property?
  I’ll be dead.

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    Donaldhump on 13/01/2023 - 17:19

    your son would pay cgt i think upon death if not ppor

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    babolimp on 14/01/2023 - 20:53

    you pay CGT when you sell, not when you inherit. older investment properties (IP) have a rule that's still grandfathered in. as a segue, let's use a father and son example.
    example 1: father buys IP before 20 September 1985. father dies today. son can rent IP, as long as he sells within 2 years he avoids CGT. alternatively, he can use it as his main residence as long as he likes and sell it with no CGT.
    example 2: father buys IP after 20 September 1985. father dies today. when son sells IP, he will pay CGT. if he used it as his main residence, there will be a partial exemption based on the time spent vs the time it was an IP.

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  whatgift on 14/01/2023 - 16:10

  What I seem to be missing is - if you’re making a profit on an IP and you end up paying tax on that profit but coming out ahead at tax time, isn’t that better? Is it because you’re unlikely to come out ahead in a positively-geared property?

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  Alexxx on 14/01/2023 - 16:13

  Depreciation schedules can result in you have an on paper loss but still have positive cashflow, reducing your taxable income.
  Depreciation is the theoretical drop in value of the building and fitout.
  In addition to this if you hold it for over a year and sell it for more then you bought it for you get a reduction in capital gains tax you pay.

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  Sylke on 14/01/2023 - 19:55

  FWIW haven't read all the thread but did anyone consider land tax - https://www.sro.vic.gov.au/land-tax , then there are the accounting fees (especially if you hold in a trust structure) , rates - water and council, landlord insurance, annual services check, agent fees, maintenance costs ( dependent on the age and type of building) buy/sell costs and the mortgage.
  Hold it for long enough and assuming you didn't buy in September 2021, you will make a profit. Sell in a low tax year or no tax year, max the profits into super, etc,
  OR if all of that's too much of headache - set the same borrowings into a quality share portfolio, avoid all of the issues in the first 3 lines and repeat for the fourth line.
  Its just two things money and time

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  squaredonut on 14/01/2023 - 21:12

  The fundamental intent of allowing negative gearing was to increase supply for the rental market. Personally I'm not sure if it's provided that benefit, versus a more reformed scheme where it can target that. Because I mean Joe doesn't have to rent it out right, they can just sit on it, let it eat away at interests and costs, and let the market increase and benefit from it.

  Having said that I believe Labor did end it at one stage in the early 90's and that caused a bit of chaos and they quickly reinstated it back.

  The other issue is the whole notion of using property as an investment has, personally in my eyes destroyed this country, from a productivity point of view, to a future generation perspective.

  • People's money should be better used to invest in companies that produces good value and good products that advances the future of the country from cleaner energy, to better medical tech or breakthroughs, whatever it is, it's still better than people lumping all their cash on basically land, that really doesn't move this country forward

  • The future generation has very little hope and is getting shafted, it only makes this country more expensive, because the main thing is, people can't afford to live in this country, they bugger off to somewhere that's better, at least has a bit more chances, then you have to import and replace the skilled people we lose.

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  mousie on 14/01/2023 - 21:18

  Negative gearing is a farce.

  The vast majority of politicians have an investment property on their declared interests and in many cases, more than 1.

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  bobolo on 20/01/2023 - 09:46

  Negative Gearing = losing $1 to save 37c

  Positive Gearing = making $1 to pay 37c

  Which one would you choose?

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