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Is Negative Gearing bad for you?

Discussion in 'Money Management' started by jeromanomic, 30th Sep, 2014.

  1. jeromanomic

    jeromanomic Active Member

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    20th Jul, 2014
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    Location:
    Perth, WA
    Just had a read of this:
    Is Negative Gearing Really a Benefit? — The Finance Guy

    It raises an interesting point, if negative gearing is just a way of recouping losses, then why do we put so much effort into keeping it?

    Wouldn't we be better off if we made more money and paid more tax? or have I missed something?
     
  2. Investor23

    Investor23 Member

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    Adelaide, SA
    In my eyes, negative gearing is ok if the underlying asset is appreciating in value by more than it is costing you per annum. Ultimately it would be ideal to have an asset appreciating in value being either positive or at least neutrally geared. Negative gearing is fine in short term though.

    Yes negative gearing brings tax benefits but really it is only partial compensation for money you have lost. Negative gearing into an asset that is not appreciating is pointless.
     
  3. jeromanomic

    jeromanomic Active Member

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    Perth, WA
    The problem is that capital appreciation can only be forecast, it is not assured. People are being sold properties with the idea that the capital appreciation is guaranteed... Given that in Australia, property has done very well, but you still need to have the right one in the right place :)
     
  4. GregR

    GregR Reid Consultants

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    Berwick Vic
    Negative gearing is not a strategy that most investors deliberately undertake, it is a consequence of a leverage strategy. If all investors paid 100% of the purchase price of the asset, there is unlikely to have 'negative gearing' arising or costs being greater than income unless it is a completely dud investment.

    When talking real estate, some investors will have higher or lower benefits based on their marginal tax rates (MTR) and may get greater tax reduction with buying new properties with a higher depreciation and building allowance component or even stamp duty on lease but it should not the reason why a particular property is purchased.

    The leverage strategy undertaken should be based on long term financial goals, so it will depend on what starting position, what income is available to service any debt and what equity is available over time. If an investor is purchasing an investment property (IP) in most cases it will be based on looking for long term capital growth. Of course it is an assumption but using historical data and long term projections of population growth and demand as well as supply, the risk can be mitigated. Other investors will purchase income assets, where there is a lower expectation of growth.

    If you can locate and purchase assets that do not result in losses, most rational investors will chose these on the premise that the anticipated capital growth is the same. The difficulty is finding these or purchasing at a price that will not result in short term holding losses in a location that the investor is comfortable with. Always keep in mind, wealth is asset less liabilities, so the goal should be to build the asset base and then over time, reduce the debt. When you do that will depend on your own goals and where you are in the working life cycle.

    As the tax rates have been reduced over the decades, especially from the 1980's, the subsequent tax 'benefit' has reduced significantly also unless you are on a very good income.

    Property investing is about the long term, unless you are a developer, so we take advantage of the tax rules of the day but they are not the driving force behind a purchase decision.