Negative Gearing and Capital Gains Tax Discounts: What Property Investors Need to Know
As a result of the federal elections, more property investors are back to the market. In this article, let’s look at negative gearing and CGT and how you can leverage the advice to pick properties that will yield the best results.
How Can Negative Gearing Impact You as a Property Investor?
Gearing occurs when you need to borrow money for any investment, but it’s usually used to reference property investment specifically.
When you earn more income on your property than you need to pay back on the loan, it’s called positive gearing.
If you’re paying more per month than you’re making, that’s negative gearing.
While negative gearing may seem like the worse possible scenario, there are ways to use it to your advantage. The tax code allows you to claim certain expenses relating to the property as tax deductions which can assist in keeping your taxes low.
If your loss is enough, you can use that to counter your salary and thus put yourself into a lower tax bracket. As you might imagine, this tactic works best for people with higher taxable income.
If you’re buying in an especially tight market, like Sydney, it doesn’t take much to achieve negative gearing. In May, the yields for annual rentals were around 3%. If you put a 20% deposit down and had a 4% interest rate, you’re likely to be at a deficit until you sold. If the present party removed these benefits, property investors would likely skimp on maintenance costs.
Negative gearing benefits can be a controversial topic for many Australians:
- Some people believe that negative gearing artificially inflates the value of homes, making it harder for first-time homebuyers to get in on the market.
- Others dismiss the effects as negligible at best or claim that the positives still outweigh the downsides.
Regardless of personal opinions though, investors should know that there are ways to work negative gearing into a successful long-term investment strategy.
The other key component to investing today is the benefit of the capital gains discount. If your property is rapidly rising in value, it can work to your advantage in more ways than one.
How Does Capital Gains Tax Discount Work?
Capital gains tax discount occurs when you hold onto a property for longer than 12 months. You can get up to half off your total taxes, which can be a significant discount for anyone who wants to maximise their total investment.
You can also apply capital losses to your capital gains before totalling your appreciation. Capital losses can be anything from real-estate commission to closing costs from the original sale. These can make it even easier to pay the capital gains tax when the time rolls around.
Capital gains apply to the following:
- Individuals, super funds, and trusts
- Tax events on your property that take place after 21/9/1999
- Properties held for at least 12 months
- Properties that haven’t employed the indexation method
When you index your property, you divide the Consumer Price Index (CPI) at the time of purchase by the CPI at the time of the property sale It essentially means you’re factoring in all the details that may have caused your property to rise in value.
For example, if a major company moved into the area and that led to you being able to raise your rents substantially, the indexing method would reflect this.
It should be noted that you’re still allowed to claim the discount if you’ve inherited a property. As long as the original property owner bought the property after 19/9/1985 and owned it for at least 12 months before you sell, you’ll still qualify for the discount.
You can also claim this benefit in the case of a divorce or relationship instability. So long as you and your spouse owned the asset a combined total of 12 months or more, you’re still eligible.
Finally, if your property was destroyed or otherwise lost and you needed a rollover replacement due to the event, you can still apply so long as you owned the rollover and original asset for a year or longer.
The Philosophy Behind the Rules
The government recognises that the private rental market is a stable resource when it comes to providing people with the housing they need to live. Social and public programs can certainly take care of a fraction of people who need help, but they can’t provide for all.
Investors who commit to a 30-year loan are essentially committing to 30 years of providing housing for other people in the community. If investors are taking a loss on their property due to average rent prices, the federal government is doing what it can to make up for the differences.
Property investment takes a lot of time and energy on the part of the investor, but there are plenty of ways to offset your effort by seeking out expert advice.
Shore Financial can help you assess the real value behind the property. Contact us today to get started, and start building your wealth today.
Disclaimer: This is general information only and should not be taken as financial advice. Please speak to a Shore financial planning professional before making a decision on your property investment.