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Negative Gearing Explained

[24/02/2016]

There has been a lot of talk about negative gearing in the media lately, with the government debating the pros and cons of restricting the concept. But what is negative gearing? How does it affect homeowners? And what would the proposed changes mean?

If you buy a house that makes more money (in rent) than it costs (in repayments), then you can say it's positively geared. The mortgage is essentially paying itself off. However if the rent does not cover the costs, a person can claim that loss on tax. This is known as negative gearing.

The way it works is that a negatively geared taxpayer can have the amount removed from their taxable income. For example, someone earning $80,000 a year would only pay tax for $70,000 earned. Statistics show that around 64,000 Australians are utilising negative gearing for an average net rental loss of less than $10,000.

Negative gearing results in a subsidised investment that people can make guaranteed money on, making it an attractive option that ultimately pushes prices up. Contrary to this, the idea behind negative gearing was originally to encourage new homes and a competitive property market with lower prices.

The argument is that it makes it more difficult for first homebuyers and young people to enter the property market, while older investors reap the benefits of the system. Proposed changes to negative gearing would see the tax break restricted to only new homes being constructed, and exclude existing properties from the benefit as of 2017.

Analysts suggest this will result in an influx of new homes built, which not only helps with Australia’s housing shortage, but also would reduce prices and increase affordability. The concept and debate surrounding negative gearing emphasises the importance that the housing industry has on the economy, community and individuals.

Whatever the outcome of the proposed changes, it is certain that negative gearing will remain a driving force of homeownership and investing alike in Australia.
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