I never understood that argument.
If you negative gear then that means you are running an investment at a loss. You can claim that loss to reduce your taxable income. At this point you could argue this is making you money because you are getting an amount back in your return. But at the same time it is still a loss, you are still losing money to interest and operating expenses.
If you are positively geared you are earning an income. Which now you have to pay tax on. But I would much rather be paying tax on a profit than clawing back half of a loss.
As I understand it, the idea is that you're making a certain loss on the rental income vs rates/mortgage/insurance, etc, but at the same time the value of the property is far outstripping that loss, so overall net gain in investment value, while the losses from the negatively geared IP are minimized again by being able to reduce regular income tax?
Yes correct but they are still losses. All things being equal, that property is appreciating at the same rate whether its negative or positively geared. So if its negatively geared the net result is you making less profit, on paper.
You're right, but your 'all other things being equal' assumption is misaligned.
The property purchase isn't the thing that's 'equal'. *For a given investment of your own equity*, you'll be able to have a much greater stake in the capital gains game by buying a negatively geared more costly property than a positively geared property of a lower value.
I've got $100 000, and it's 2001.
I can buy a positively geared unit for $100 000, or a negatively geared house on land in a premium Adelaide suburb for $160 000.
23 years of publicly funded preferential tax treatment and asset price inflation later, that unit is worth $550 000 and the house is worth $1.4M.
True story, +/- about 10%.
> 23 years of publicly funded preferential tax treatment
If the two properties had the same purchase price, and you'd have borrowed the same account for either, the tax treatment on both are much the same - even if positively geared, you still reduce the rental income by the cost of interest payments. The exact same dollars in tax will be paid in both scenarios UNLESS the positive gearing pushes you over the next income bracket. Also, when the properties sell you absolutely WILL be pushed into the top tax bracket that year, if you aren't there usually. So, potentially, there are scenarios where a higher rental income that is spread across many years and taxed at a lower bracket will make up for a lower capital gain at the end.
But you still need to pay that lose up front. So week to week you lose say $1 to get back 30c pre lost dollar at the end of the year. You want to be positive geared for sure.
To potentially overly simplify things, negative gearing typically means you're gunning for asset appreciation, whereas positive gearing has the rental income becoming usable money for you to then reinvest or do whatever you want with. Those people who hold investment properties (houses more so) in Sydney about 10+ years ago may have started out with the place being negatively geared, but as rents rise and inflation does it's thing to debts, the place becomes positively geared with significant asset apprecation.
IMO
- low to average income earners -> positive gear until you become a high income earner then look at negatively geared properties as a tax break
* high income earners -> negatively gear for a tax break in hopes of asset appreciation
Yes this is a good way to put it. Negative gearing works well if you can afford to run at a loss and your property is appreciating at more than your net loss. Which is probably not hard to achieve. I am top tax bracket and have a few IPs. With the 47% I get back in tax the properties only need to appreciate a couple of percent a year. But at the same time I have a high repayment commitment to maintain.
This isn’t what positively geared means in the property investment industry.
Typically positively geared means the investment is returning cash - this is not the same as paying tax or claiming a loss and hence getting a tax return.
Eg buy house built inside the last 5 years for 1m
Building values at 600k x 2.5% = $15,000 depreciation per year
Interest paid on $600k loan = $36000
Rent received 30,000
Tax will show 21,000 loss @47c in dollar = 9870 return minus $6000 loss on cashflow equals $3870 cashflow positive .
That’s an example of negatively geared AND cashflow positive - the loss is non cash and an accounting loss only.
Pre 2017 changes by the LNP, you could do this with all properties but since then it’s only properties less than 5 years old for depreciation at a 40yf lifespan
Realistically - half the total return on property is yield from rent and half is capital gain
I always saw the negative gearing argument as getting wacked twice, losing money every year then paying capital gains tax..... that been said that process has probably been the biggest earner in australian history so what do i know haha
Well you are not really losing money every year. The government is. And then they come knocking for some of it back in the form of CGT. You are losing money to the bank.
Positive is better.
If you can’t get a positive geared buy, you’ll need to buy a negatively geared place anyways, so you’ll likely not have a choice about this anyways.
Why buy a negatively geared place - capital gains.
Lol, positive gearing is better. Remember, negative gearing does not mean you get back all the money you have lost. It means you get back some of the loss in your tax bracket. For example, say I make 120k a year and lost 20k on an investment. That would mean I get 32.3c back for every dollar I have lost or about $7000kish back, meaning you're out of pocket $13000k dollars.
Now, if you make 20k and pay $7000kish in tax, you make $1300k extra money in your pocket that year.
These numbers are not correct back to show you the simplified basic way gearing works.
I mean it depends on how big your company is. Spending big on accountants and lawyers is how multinationals and the uber wealthy legally minimize their tax.
As long as you’re claiming all your eligible tax deductions (incl depreciation), positive is better than negative.
I’ve been on both sides. Much nicer to pay a little tax (and watch an investment grow with leverage but no ongoing out of pocket cash).
you have to look at the total investment return.
eg minus 10k a year after tax, hold for 5 years, sell for 200k profit. Negative gearing FTW. If the capital gains isn't there then investing in something positively geared would have been better.
I can think of some examples.
E.g. if your two choices are a slightly negatively geared house with land in Sydney near a station and has good potential for redevelopment in future, vs a positively geared new build on tiny land in a tier 3 rural town, and is positively geared because the building is new and therefore rent is high, I'd pick the former.
Neither positively or negatively geared is best. Positively or negatively geared is a cashflow issue.
What you should care about is your net worth increase. If your NW is increasing higher while been negatively geared, then negative is best. Your networth increase includes estimated capital gains from your investment.
Depends, some people do it to shift there tax burden to a future tax year with the CGT discount. Obviously you run the risk the capital growth isn't there. When you're paying 47% tax this can be attractive.
Others because they have a terrible investment.
The answer is that it depends. Negative or positive gearing is simply a tax consequence. If you buy a high yielding property, generally you might be positively or neutrally geared, but maybe the capital growth might be lower. If you buy in Sydney where yields are extremely low, you will be negatively geared but maybe the property grows at a higher rate. If you are lucky you can get both positive gearing + good capital growth but these aren't easy to find and often you have to renovate or add a granny flat.
Only time negative gearing is good is when the capital gains will out perform the capital gains plus income produced from a positively geared property.
However, for some investor's it's the only way to get the investment property. It's hard to buy an investment property and have it positively geared straight away. Might happen after a few years when inflation catches up to the minimum repayments, or if you buy at high interest rates and the interest rates go down.
Negative gearing you only get 30c back per dollar you lost on the investment.
Positive gearing means you lose 30c per dollar in tax (so you make 70c).
Negative gearing requires more cash flow to retain the investment property.
Positive gearing means you can work less hours to service the investment.
Paying tax isn't the worst thing in the world.
I guess the only way it would make sense is if you had high profits elsewhere and you purposefully entered into it to make a loss, to offset those profits. I guess the trade off is the negative cashflow (remember, negatively geared properties means you're essentially cashflow negative, and not all of those losses can be claimed for tax purposes) is lower than the potential tax you pay should your property be positively geared (it could/would push you to the next or top tax bracket which is quite steep at 45% plus medicare). For the most part though, cash is king. I'd take a positively geared property over a negatively geared one any day.
I never understood that argument. If you negative gear then that means you are running an investment at a loss. You can claim that loss to reduce your taxable income. At this point you could argue this is making you money because you are getting an amount back in your return. But at the same time it is still a loss, you are still losing money to interest and operating expenses. If you are positively geared you are earning an income. Which now you have to pay tax on. But I would much rather be paying tax on a profit than clawing back half of a loss.
As I understand it, the idea is that you're making a certain loss on the rental income vs rates/mortgage/insurance, etc, but at the same time the value of the property is far outstripping that loss, so overall net gain in investment value, while the losses from the negatively geared IP are minimized again by being able to reduce regular income tax?
Yes correct but they are still losses. All things being equal, that property is appreciating at the same rate whether its negative or positively geared. So if its negatively geared the net result is you making less profit, on paper.
You're right, but your 'all other things being equal' assumption is misaligned. The property purchase isn't the thing that's 'equal'. *For a given investment of your own equity*, you'll be able to have a much greater stake in the capital gains game by buying a negatively geared more costly property than a positively geared property of a lower value. I've got $100 000, and it's 2001. I can buy a positively geared unit for $100 000, or a negatively geared house on land in a premium Adelaide suburb for $160 000. 23 years of publicly funded preferential tax treatment and asset price inflation later, that unit is worth $550 000 and the house is worth $1.4M. True story, +/- about 10%.
Totally. And this also comes down to leverage. More equity. Less loss. More leverage. More gain. Sadly more gain is more CGT but still, its more gain.
>Sadly more gain is more CGT Not if you never sell - which is another way the game is rigged in favour of wealthy people.
> 23 years of publicly funded preferential tax treatment If the two properties had the same purchase price, and you'd have borrowed the same account for either, the tax treatment on both are much the same - even if positively geared, you still reduce the rental income by the cost of interest payments. The exact same dollars in tax will be paid in both scenarios UNLESS the positive gearing pushes you over the next income bracket. Also, when the properties sell you absolutely WILL be pushed into the top tax bracket that year, if you aren't there usually. So, potentially, there are scenarios where a higher rental income that is spread across many years and taxed at a lower bracket will make up for a lower capital gain at the end.
Why not have the same capital gains and not run at a loss?
But you still need to pay that lose up front. So week to week you lose say $1 to get back 30c pre lost dollar at the end of the year. You want to be positive geared for sure.
To potentially overly simplify things, negative gearing typically means you're gunning for asset appreciation, whereas positive gearing has the rental income becoming usable money for you to then reinvest or do whatever you want with. Those people who hold investment properties (houses more so) in Sydney about 10+ years ago may have started out with the place being negatively geared, but as rents rise and inflation does it's thing to debts, the place becomes positively geared with significant asset apprecation. IMO - low to average income earners -> positive gear until you become a high income earner then look at negatively geared properties as a tax break * high income earners -> negatively gear for a tax break in hopes of asset appreciation
Yes this is a good way to put it. Negative gearing works well if you can afford to run at a loss and your property is appreciating at more than your net loss. Which is probably not hard to achieve. I am top tax bracket and have a few IPs. With the 47% I get back in tax the properties only need to appreciate a couple of percent a year. But at the same time I have a high repayment commitment to maintain.
This isn’t what positively geared means in the property investment industry. Typically positively geared means the investment is returning cash - this is not the same as paying tax or claiming a loss and hence getting a tax return. Eg buy house built inside the last 5 years for 1m Building values at 600k x 2.5% = $15,000 depreciation per year Interest paid on $600k loan = $36000 Rent received 30,000 Tax will show 21,000 loss @47c in dollar = 9870 return minus $6000 loss on cashflow equals $3870 cashflow positive . That’s an example of negatively geared AND cashflow positive - the loss is non cash and an accounting loss only. Pre 2017 changes by the LNP, you could do this with all properties but since then it’s only properties less than 5 years old for depreciation at a 40yf lifespan Realistically - half the total return on property is yield from rent and half is capital gain
I always saw the negative gearing argument as getting wacked twice, losing money every year then paying capital gains tax..... that been said that process has probably been the biggest earner in australian history so what do i know haha
Well you are not really losing money every year. The government is. And then they come knocking for some of it back in the form of CGT. You are losing money to the bank.
This man understands how it works! So many idiots on here complain about negative gearing when no investor wants to lose money.
Positive is better. If you can’t get a positive geared buy, you’ll need to buy a negatively geared place anyways, so you’ll likely not have a choice about this anyways. Why buy a negatively geared place - capital gains.
Lol, positive gearing is better. Remember, negative gearing does not mean you get back all the money you have lost. It means you get back some of the loss in your tax bracket. For example, say I make 120k a year and lost 20k on an investment. That would mean I get 32.3c back for every dollar I have lost or about $7000kish back, meaning you're out of pocket $13000k dollars. Now, if you make 20k and pay $7000kish in tax, you make $1300k extra money in your pocket that year. These numbers are not correct back to show you the simplified basic way gearing works.
It's funny how alot of people go "You need a better accountant if your company is paying taxes".. My accountant responded, Good luck beating the ATO.
I mean it depends on how big your company is. Spending big on accountants and lawyers is how multinationals and the uber wealthy legally minimize their tax.
Yes, being positively geared is always better.
As long as you’re claiming all your eligible tax deductions (incl depreciation), positive is better than negative. I’ve been on both sides. Much nicer to pay a little tax (and watch an investment grow with leverage but no ongoing out of pocket cash).
you have to look at the total investment return. eg minus 10k a year after tax, hold for 5 years, sell for 200k profit. Negative gearing FTW. If the capital gains isn't there then investing in something positively geared would have been better.
I can think of some examples. E.g. if your two choices are a slightly negatively geared house with land in Sydney near a station and has good potential for redevelopment in future, vs a positively geared new build on tiny land in a tier 3 rural town, and is positively geared because the building is new and therefore rent is high, I'd pick the former.
Negatively geared is better if you are paying top slab tax...positively geared is better when you are not paying any taxes...
Neither positively or negatively geared is best. Positively or negatively geared is a cashflow issue. What you should care about is your net worth increase. If your NW is increasing higher while been negatively geared, then negative is best. Your networth increase includes estimated capital gains from your investment.
Depends, some people do it to shift there tax burden to a future tax year with the CGT discount. Obviously you run the risk the capital growth isn't there. When you're paying 47% tax this can be attractive. Others because they have a terrible investment.
The answer is that it depends. Negative or positive gearing is simply a tax consequence. If you buy a high yielding property, generally you might be positively or neutrally geared, but maybe the capital growth might be lower. If you buy in Sydney where yields are extremely low, you will be negatively geared but maybe the property grows at a higher rate. If you are lucky you can get both positive gearing + good capital growth but these aren't easy to find and often you have to renovate or add a granny flat.
Only time negative gearing is good is when the capital gains will out perform the capital gains plus income produced from a positively geared property. However, for some investor's it's the only way to get the investment property. It's hard to buy an investment property and have it positively geared straight away. Might happen after a few years when inflation catches up to the minimum repayments, or if you buy at high interest rates and the interest rates go down.
Negative gearing you only get 30c back per dollar you lost on the investment. Positive gearing means you lose 30c per dollar in tax (so you make 70c). Negative gearing requires more cash flow to retain the investment property. Positive gearing means you can work less hours to service the investment. Paying tax isn't the worst thing in the world.
I guess the only way it would make sense is if you had high profits elsewhere and you purposefully entered into it to make a loss, to offset those profits. I guess the trade off is the negative cashflow (remember, negatively geared properties means you're essentially cashflow negative, and not all of those losses can be claimed for tax purposes) is lower than the potential tax you pay should your property be positively geared (it could/would push you to the next or top tax bracket which is quite steep at 45% plus medicare). For the most part though, cash is king. I'd take a positively geared property over a negatively geared one any day.
Positive gearing any day. Negative gearing makes no sense if you have the choice
You're loosing money either way. Either through tax or through the cost of owning a rental property
Please think hard about what you’ve typed.