Negative gearing has become an increasingly popular investment strategy for Australians over the past few decades.
Proposals made by Labor before the last election suggested that negative gearing benefits for those using it for tax minimization would be drastically reduced.
So, anyone thinking about investing in property as well as those who already have an investment portfolio may be concerned about negative gearing one day being abolished in Australia.
What Is Negative Gearing?
Negative gearing is when net rental income after property maintenance expenses is lower than interest on the investment property. While it is technically an investment loss, current tax laws allow it to be deducted from salary, wages, or other sources of income.
This reduces the total amount of taxable income, meaning less tax needs to be paid for that financial year, thus increasing the attractiveness of the property investment as a whole.
Once the property value increases to more than the costs of the outlay, long-term investments can be sold for a profit.
Why Abolish Negative Gearing?
Labor said they intended to abolish negative gearing on established homes if they won the 2019 election. They also said that investors would still have been able to use the tax concession whenever purchasing newly built properties like off-the-plan apartments.
While Labor obviously lost the election, most other countries with developed real estate markets do not allow negative gearing. This is most likely because many economists believe it inflates the price of housing, ultimately increasing difficulty for first-time buyers.
How Would Changes Affect Property Investment?
Investors currently utilizing negative gearing to minimize the amount they are taxed would most likely turn to other avenues for investment.
Commercial property would likely become a more attractive option for most investors, as it often has a much higher return on investment than residential real estate.
Commercial property prices tend to appreciate more than properties in the residential sector. This is because lease agreements often allow rent to increase coinciding with inflation, and commercial property valuations are determined by the amount paid.
Another plus would be commercial real estate prices, which historically demonstrate lower levels of fluctuation compared to residential property prices.