Scroll Top
The Negative Gearing Debate Resurfaces

Negative gearing has long been a contentious issue in Australia’s housing market, influencing investment strategies, property prices, and political discourse. As of 2024, the practice continues to shape the dynamics of real estate investment, with significant implications for investors and the broader economy. The debate on negative gearing has resurfaced yet again, prompting renewed discussions about its impact on housing affordability and market stability.

Understanding Negative Gearing: Let’s Look at the Facts
Negative gearing occurs when the costs associated with owning an investment property exceed the rental income it generates. Investors can deduct these losses from their taxable income, creating a financial incentive to invest in properties, even if they are not immediately profitable. According to the latest data from the Australian Bureau of Statistics (ABS), in 2022, of 11 million private dwellings in Australia, approximately 2.27 million people own a second property. Among these, around 935,628 individuals are negatively geared, meaning their property maintenance costs surpass rental income.

In contrast, over 1.3 million property owners have either neutral or positively geared properties. For those with positively geared investments, they pay tax on the rental income generated above the costs of maintaining the property.

How Negative Gearing Works
To clarify, only the interest on borrowings is tax-deductible, alongside depreciation expenses related to the building and various maintenance costs, such as agent fees, repairs, rates, and insurance. The principle behind gearing is that investors are willing to forego immediate cash flow to service debt, with the expectation that the debt will decrease over time while the property’s value appreciates. Upon selling, current tax law allows investors to claim a 50% discount on capital gains if the property is held for more than 12 months.

For example, if a property is purchased for $700,000 and sold ten years later for $1,200,000, the $500,000 gain is reduced to $250,000 for tax purposes, which is then added to the investor’s marginal tax rate.

Proponents of negative gearing argue that it stimulates investment in housing, increasing the supply of rental properties and helping to alleviate housing shortages. Notably, over 80% of rental properties are provided by ‘Mum and Dad’ investors. However, challenges have arisen due to increased land taxes in many states, higher interest rates compared to three years ago, and the shift from interest-only loans to principal repayments. These factors have led many smaller investors to reconsider their strategies.

Critics contend that negative gearing primarily benefits wealthier individuals, exacerbating rising property prices and making home ownership more difficult for first-time buyers. The growing concern over housing affordability has led to calls for reform, with negative gearing and capital gains tax treatment emerging as significant election issues.

Conclusion
The current state of negative gearing in Australia remains a polarizing topic. As the housing market evolves and economic conditions change, the implications of negative gearing will likely continue to spark debate among policymakers, investors, and the public. Addressing the concerns surrounding negative gearing while balancing the interests of investors and aspiring homeowners will be crucial for developing effective housing policies in the future.

With the upcoming elections, this issue is set to remain at the forefront of national discussions, shaping the future of Australia’s housing landscape.

Speak to one of our financial advisers