What Is Negative Gearing ?

Negative Gearing

Negative gearing in relation to real estate is an arrangement where an investor borrows money to buy an investment property in which the income produced by it, is less than the costs of owning and managing the property. This includes borrowing costs, interest on borrowed funds, depreciation, maintenance and managing expenses. However, it excludes any repayments of the capital outlay.

The premise of the investment is to gain tax advantage whereby the losses incurred against the negatively geared investment can be used to reduce an overall tax position, being offset against other tax liabilities.

Usually the intention of the investment is to return a nett capital gain on the investment when it is disposed of, which is greater than the accumulated losses during the period of the investment being held.

Negative gearing can also be used in relation to other investments such as share portfolios.

 

Why Is Negative Gearing Under Review ?

Negative Geared Positive Cash Flow

The Reserve Bank has called for a review of negative gearing in its submission to a parliamentary inquiry into housing ownership.

The Reserve Bank of Australia wants the government to review negative gearing, saying it is too generous a concession and may be pushing property prices up particularly in Real Estate hot spots like Sydney.

It says while the impact of negative gearing allows investors to offer affordable rents to tenants it has encouraged investment in housing.

The attractiveness of negative gearing is amplified by capital gains being taxed at half the marginal tax rate, it says.

“Since property can usually be purchased using higher leverage than other assets that produce capital gains, property is especially affected by this feature of the tax system,” it says.

Other developed nations impose restrictions and limitations on Negative Gearing.

Australia may see a gradual implementation of changes to Negative Gearing arrangements, however this will take some time to implement.