Negative gearing is an important investment strategy which allows investors to use the losses made on an investment to reduce taxable income.
Capital gains may also be taxed at half the marginal tax rate at sale.
Take this example for a negatively geared property:
Say you earn $100k. Mortgage payments and all other property expenses on your investment amount to $30k. Rental income is $20k. Your loss is $10k. That means you'll be taxed on $90k of your income. It becomes even more effective if you drop a tax bracket as a result.
Some argue that activity by investors motivated by negative gearing has pushed up house prices. But negative gearing has also also increased desperately needed supply.
One third of Australians rent. Without extra homes, rental prices will continue to rise. The extra supply on the market is already seeing rental price growth ease.
The RBA is however worried about the lift in the number of investor loans and along with the banking regulator, APRA, wants a 10 per cent limit applied to those loans offered by banks. So, banks are already making it harder to take out investor loans. Th need to have a bigger deposit is one example.
Now, the RBA wants a greater discussion around negative gearing. It isn't saying curb it, like many media outlets are reporting today, rather, it is saying let's see if there are more efficient ways of taxing property in addition to all other taxes.
Changing the negative gearing landscape would impact the 1.3 million Australians who use the investment strategy and it's one strategy many first buyers use to get a leg into the market. Admittedly, high income earners use it also to reduce their taxable income.
It would be a hard sell to change, but maybe what should be considered is limiting negative gearing to only new properties. After all, the strategy was designed to also help add stock to the market.
