Just a simple question.Why negatively gear? I know about the tax deductions involved but surely making money is better than losing it. Why give the gov’t $1 so you can get a maximum of 48.5c back and still be 51.5c worse off when you could make $1 and give the gov’t a maximum of 48.5c(only if u are in the top tax bracket and also can’t come up with any more paper deductions like depreciation) and be 51.5c better of instead. Even if you take into account the potential for capital gains that may be greater than the cost of servicing a -vely geared property the fact that you could be receiving an income from the positively geared property would mean that you are closer to purchasing property number 2, 3, 4 and so on and therefore be better off.
NOTE: Please dont think that I am saying finding a positively geared property is easy. I realise that it is extremely difficult, particularly in the current inflated market. I just cant understand how so many people can be saying that negative gearing is so great and will solve all their tax problems when positive gearing appears, to me at least, to be a much better option. Even apparently reputable sources of information with no vested interest in the market such as the websites of major newspapers in Australia seem to trumpet negative gearing.You’ve hit the nail on the head…
Propertyinvesting.Com is the HOME of positive cashflow investing – I would say 95% of the investors in this forum believe and practice positive cashflow. If you browse through previous posts I am sure you will see this message shinning through
Good Luck with you own investing….
Pete
…Beware of the dreamtakers…
Just to continue on from what I said earlier, what does everybody think will be the future of negative gearing? I dont mean for investors but rather legally. I believe Australia is one of the few western countries that still allows the interest to be deducted from income for tax purposes(am not certain of this and welcome correction) and I was just thinking that perhaps it’s days may be numbered here too. I understand the possibility of getting rid of this deduction was raised in political circles recently although it was shot down pretty quickly. I am just thinking that maybe the politicians realise that getting rid of it now would be political suicide because everyone is so geared at the moment and it would completely wipe out the real estate market so they are maybe waiting for the eventual interest rate hike to rationalise the market a bit. It would take out of the market those extremely vunerable negative gearers then perhaps the politicians would consider getting rid of negative gearing. I would imagine that given the amount of money being poured into the market at the moment the gov’t would be in for a huge revenue windfall if they were to get rid of it in a period when the market is less overheated.
The other problem about negative gearing is that, sooner or later, the government (whoever it is) will have to do something to reign it in. The longer they leave it the uglier it will be when it happens….Mark Latham touched on this the other day before being pulled into line….
I once heard a wonderful quote by share guru Warren Buffett…’when the tide goes out you find out who is swimming naked’…I figure the quote applies equally well to property as shares and there are a lot of people out there over-extended because of ng.
Maybe I’m simple but I figure if a property can’t be at least neutral then you shouldn’t be in it…but then again I’m new to this game and haven’t even bought my first investment property….so what would I know.Wouldnt changes to the tax deductibility of loses on property also effect positive cashflow properties that are positive due to depreciation ?
Im not sure how such a change would be structured.
Thats true I guess. It would affect property both ways. It is just that the whole idea of negative gearing to me seems to be the tax deduction. Take that away and people are just left with a plain expense(as apposed to one they can trick themselves into believing is something else!). But yes getting rid of the deduction would affect pos geared properties and their profitability too I guess.
DG and Wally, the tax advantages are not the reason to gear a property. The main reason most people (should) gear into property is to generate wealth from capital gains. The effect on the tax you pay just helps you along the way.
If you negative gear a property you would be betting on a capital gain.
If it’s neutrally geared, you would still be betting on capital gain, but it’s an easier investment to live with.
If you positively gear a property, the capital growth is not as important because the investment is generating income from day one, but you need quite a few of them to get a substantial income as there typically isn’t much capital growth. I believe it comes down to personal preference. The term Negative Gearing has been pumped up by the media for years along with marketeers. I reckon, a lot of people have heard the hype and get the feeling they should be doing it so jump in head first without educating themselves.
I have talked about it with friends and I get the impression they are frustrated because they want to do something but don’t have the know how…. I tell them to educate themselves, read books.
Anyway, didn’t mean to ramble, its been a long night.[
]>DG and Wally, the tax advantages are not the reason to gear >a property.
Although you can legally minimise tax, if avoiding tax is the only reason you bought an IP doesn’t that even make it illegal?
cheers-
MiniHi, my first say at the forum.Interesting views by everyone. I don’t know the answer but an atricle in The Age last week described negative gearing as a “Baby Boomer Product”. It also mentioned Mark Latham’s regular foot in mouth comments that Simon Creen quickly doused. When the Hawke/ Keating Gov stopped Neg Gearing in 1985, rents went up 26% and the building industry suffered. They had to bring it back and raise interest rates to keep it in line. The rock and a hard place that the Reserve Bank is between, can’t simply raise interest to slow things down because it would put the dollar up and cripple export especially farmers who are still sufferring the drought. So Neg gearing is here for a while longer and meanwhile I’ll just keeping on looking for positive cashflow
Firstly – entelechy welcome to the forum
I have to agree with your “Baby Boomer Product” comment. The average baby boomer investor has been hooked on the concept.
I was having a conversation the other day with a 40 something woman about Positive Cashflow Investing and its virtues.
She loved the concept but kept repeating the statement “but if its positive cashflowed you can’t negative gear it” Its like banging your head against a brick wall with most baby boomers, most believe that negative gearing is the ONLY way to buy properties.Pete
…Beware of the dreamtakers…
I happen to be a baby boomer, I think the last answer is too simplistic.
Its not a question of being “hooked” on the product.
!. most properties are negatively geared.
2. Most “invest” seminars are pitched at neg.gearing.
3. Most pos.geared properties are not in the “comfort” zone of areas that people are familiar with.
4. They don’t understand pos/neg gearing.
5. New developements come “packaged” and pitched at investors, they don’t have to think too much or look too far.
This doesn’t explain why city high rises are still being brought “en masse”.When I said that interest rates would rise I was talking medium term. Lots of real estate commentators seem to think that there will be a change in the stange of monetary policy stance to contractionary in about 2 or 3 years. Have heard 2006 mentioned more than once although that is not much more than a stab in the dark. Entelechy was correct about the exchange rate comment which I hadn’t thought of before although the rise in the ex rate because of an interest rate rise would be lessened because of the crowding out effect of the rate rise on investment. But still the ex rate concerns may mean the RBA may want to wait for the Feds in the US to raise theirs a bit which is not coming until fears about deflation go away. So I guess in summary I think that interest rates wont go up much in the short term but in the medium term they are coming. The RBA is going to want to reign in the spending in residential property eventually and once this does it may give the gov’t an opportunity to act in some form on negative gearing. Particularly if the market goes down quickly and wipes out alot of negative gearers there will be alot of angry people who may feel resentful towards those who sold them the negative gearing idea and negative gearing may go out of fashion very quickly. This could give the gov’t even more room to move.
Not hooked but illinformed. Nobody is suggesting that these people are gullible although the sales pitch has been effective and the targeted audience have nothing to compare.
There is nothing wrong with having a loss at the end of the year providing you did not have to put money in from your own pocket. What the ATO is looking at this year is not so much who’s showing a loss but how they are claiming and what they are claining as legitimate expenses.Hi Everyone,
Thought I would try and balance the views a bit. Why negative gear? There are a lot of reasons and you will see why by the end of this post.
(To give it away you will see that the BEST strategy is actually to have both Negative AND Postively geared properties, with a ratio of 1/3 or 1/4). I will not go into the details , but just give a quick overview. I will let you fill in the gaps.
The reason why negative gearing has been so popular is that the numbers add up. Yes that’s right, you are actually better off negative gearing that doing nothing! (Ok the main disadvantage to negative gearing is that if you can’t find a tenant than you suffer.)
We need to have a closer look at the people who negative gear. Negative gear is fine if you are a “causual” investor. (1, 2 maybe 3 properties MAX!)
Negative gearing is not recommend for serious investors. (3 or more properties) since there is a limit to how much you can borrow.
We will look at three cases. (I ran the numbers on a spreedsheet.)
Case 1
Income $80,000
Taxable amount $80,000
Tax $24,980
Left AFTER Tax 55,020Case 2 (Negative Gearing)
Income $80,000
Rent $15,000
Loan Interest $20,000
Non Cash Deductions $10,000Taxable amount $65,000
Tax $17,930Left AFTER tax 57,070
NOTICE that by negative gearing the person is $2,000 BETTER off than if they did nothing!
(OK Now try and tell someone that Negative gearing is wrong [])Case 3 (Positve gearing)
Income $80,000Rent $10,000
Interst $8,000
Non Cash Deduction $5,000Taxable amount $77,000
Tax $23,570Left AFTER tax $58,430
OK cleary this case is better if we only look at these figures. However if you look at the WHOLE picture things get a bit more interesting.
Now lets say that the Negative geared property is worth $400,000 and the Positievly geared property is worth $150,000. If they both grow at 8% per annum (OK this is very optimistic especially for the positively geared property!) At the end of 5 years the equity build up on the “neg” IP is $187,700 whereas the “pos” IP will be $70,339. (This is a difference of $117,000 in 5 years!!!).
It is VERY clear which property is best. OK I am sure you will find fault with this reasoning, but in all fairness there are ALWAYS problems with whatever strategy you use. So it really depends on each individual investor what strategy they want to use.
Sure Pos gearing is the way to go if you don’t have a strong income, but it is NOT the only way. Actually as I have said at the beginning the best is to have a mixture of both. There is a lot more that can be said and a lot more “Interesting” observations that can be made, but I will leave you to work it out.
There is as lot more to property than Just being Positive or negative, the depreciation is important as well as the growth.
The IDEAL property for a person with good income is a brand new house, in a growth area, with good deductions and is neutral geared.
The IDEAL property for a person on low income is a pos IP.
The IDEAL property for a VERY rich person is a neg IP.
Every person is different, but for the majority of us the best portfolio is a mixture of pos and neg IP.
OK hope this all makes sence…
*************
Australian Property Software
APIM: http://www.apim.com.au
APDM: http://www.apim.com.au/apdm.htm
*************Yes I tend to agree its horses for courses. I have two new properties worth near $500,000 in high growth areas. i.e. 10% pa so I’m getting $50,000 growth pre CG tax on them per year for now at least. They are both negative geared and after tax will cost me about $120 per week to hold the two of them. thats $6240 per year holding cost for $50,000 pre tax growth. Even after CG tax effects I’m ahead by about $18,000 on 1 years growth. ( excluding inflation effects ) with inflation at 4% im ahead about $15,000 net gain. So the numbers speak for themselves.
The other reason I buy brand new is because I buy interstate properties and I dont want the hassle of managing repairs from a distance. Its easier for me to buy brand new and just get an independant property valuation. New generally property has less maintenance issues.
OK so if I can no longer fund negative cashflow properties, I just buy a positive one when I absolutely have to.
Sure, negative gearing means you are actually making a loss. But as others have posted, there are benefits, and it does work for some people.
One thing that nobody seems to have talked about is how you can use negative gearing to “shift” your tax deductions into your own home. For example, if you get a tax refund from your negatively geared property, you plop the entire amount into your home mortgage. This will not only allow you to pay off your home mortgage more quickly, it also allows you to own an investment property with all the upside (and risks too) that come with it.
Willi – that 40-something woman was wrong, it’s possible to have a negatively geared property that is cash flow positive. This is where your rent is more than all your expenses, including interest, but less than your expenses plus the depreciation allowance. This means you will still record a “loss”, entitling you to a tax refund, even though you are getting more cash in rent than you are paying in expenses.
However, you can’t be too greedy when claiming tax deductions on a negatively geared property. Negative gearing essentially relies on the principle that you are running a “business”, namely your investment property, to generate a profit, and expenses incurred are tax deductible. But you need to have a reasonable prospect of actually making a profit in the future. If the ATO decides that you will never generate a profit within a reasonable period, they can disallow your negative-gearing deductions.
Hope this is helpful
Cheers
Mwhy negative gear if you can positively gear. which one would you choose?
of cource you would choose +ve gearing. You would be a fool to choose it otherwise.
does anyone know what the definition of -ve gearging is?
if you did you would not choose it, right?
any commentsHi dhdtang,
respectfully, I don’t agree with you there. As I said in my earlier post, you can in fact have a postive cashflow IP which is ALSO negatively geared. That’s the beauty of depreciation.
Depreciation is a non-cash flow expense. It doesn’t take any money out of your pocket. Some people call it a “phantom” expense. But it’s quite legitimate, and you’re in fact entitled to claim a depreciation allowance on an IP as part of the expenses relating to an income producing asset.
The only thing is to ensure that you’re claiming the correct amount of depreciation – you’ll need a licensed quantity surveyor to prepare a depreciation schedule for you, and maybe an accountant too to advise you on specific depreciation issues.
You asked what the definition of negative gearing is – the simple definition is that it’s where you make a net loss (including depreciation) from your IP, which entitles you to claim a tax refund.
It’s true that not every property you come across will fall within the parameters I’ve described above, but if you find one like it, why wouldn’t you go for it? It gives you the best of both worlds – positive cash flow AND a tax refund!
Positive gearing is a slightly different concept from positive cashflow investing. Positive gearing simply means that your total income exceeds your total expenses, including depreciation. As I tried to explain above, just because you have a positive cashflow IP doesn’t mean you are positive gearing.
I’ll leave you all with some food for thought – is too much positive gearing a good idea? Some would say that if you overly positively gear an IP, you’re incurring an opportunity cost, because you’ve got too much equity tied up in the IP when you should be making full use of other people’s money.
Cheers
MElysium – M
i would like to challenge you on that thought re -ve gearing
can u contact me on [email protected]
Sure – I’d love to hear your views.
Will e-mail you tonight when I get home.
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