YOU buy a house to rent out as a way to make money.
But the cost of maintenance and the interest you're paying on a home loan is more than the rent you're getting paid, so you are out of pocket.
The Tax Office allows people in this situation to claim the loss as a tax deduction. But Shadow Treasurer Chris Bowen has indicated a Labor government would consider cutting back on the concession.
Economic experts differ in their thoughts about proposed changes.
Queensland University of Technology property economics expert Professor Chris Eves did not believe the situation should change.
He said negative gearing acted as an incentive for investors to enter the property market.
Without that incentive, he said there would be a massive impact on the economy. There would be less incentive to build houses and the government would have to provide more affordable social housing for renters.
Prof Eves said savings an investor made through the deductions were not large.
"For it to be a substantial amount you might have to own 11 or 12 houses before you get to a point where there is no tax paid at all," he said.
"But for most mums and dads who own a second house that they negatively gear, it's not as if it's a fortune that is coming back."
But Griffith University's business school economics professor Fabrizio Carmignani was in favour of changing negative gearing.
"I do believe the budgetary cost is huge," he said. "I do believe with this money we could do more in terms of sustaining lower income families and making housing affordable for younger generations."
Claiming a tax deduction for negatively geared investments has been part of the tax system for decades.
The Hawke government abolished it in 1985 as it was believed it was costing the government $175 million.
Rental prices increased in Perth and Sydney. It is debated whether abolishing negative gearing deductions caused this. They were re-instated in 1987.
Mr Bowen did not want to disadvantage investors who made decisions under current rules nor reduce housing supply. But it was responsible for Labor to consider how to tackle the economy.
Treasurer Joe Hockey said taking away negative gearing would have flow-on consequences for people who rent homes. - APN NEWSDESK
What is negative gearing?
- It means that the interest on a home loan and expenses being paid on a house (such as maintenance) are more than the income made from rent. The homeowner is making a loss. The "negative" is the loss and the "gearing" means there is a loan involved
- When this occurs, the owner can claim a tax deduction.
- When they do a tax return, the owner can claim a deduction for the full amount of rental expenses (such as repairs on the house etc) against their total income (including wages and rent from the property).
Here is an example:
- John owns a house and gets $50,000 in rent from it each year.
- Keeping the house in shape and the interest paid on the mortgage costs a total $60,000.
- John has a taxable loss of $10,000. Therefore, he can use this to reduce the tax payable on his wages.
Debate in summary
THERE are many arguments for and against tax concessions on negative gearing. Here is a breakdown from the experts:
- It is an incentive for people to enter the property market. Queensland University of Technology's Professor Chris Eves said this led to more rental properties for those who could not afford to buy.
- This incentive leads to more investors and therefore a need for more houses and construction jobs. And the flow-on continues, as this stimulates the need for blinds, whitegoods, tiling, paving and furniture for new homes.
- It can be a way for people to prepare an income for retirement. House values increase over time and at some point, an investment that is negatively geared could come to make a profit (and be therefore "positively geared"). The option for retirees is to sell (and make a profit) or use rent as an income.
- Investors do not get much money back through the tax deductions. For example, if a person bought a $500,000 house, they could be paying $30,000 in interest on a home loan plus repairs and other costs. But if they're getting $500 a week in rent (or $26,000 a year), that is a total loss of only $4000. This is the amount that can be used to reduce total taxable personal income.
- While negative gearing can make housing investment more affordable for middle income earners, tax deductions and savings tend to benefit those higher income earners who can afford many homes, therefore making the rich richer.
- It costs the federal budget "a lot", says Griffith University's Professor Fabrizio Carmignani. He said it was in the billions of dollars.
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