Jamie Alcock on Negative Gearing

I think there are possibly at least 50 threads over the years about how to be a McScrooge in order to free up funds for investing in IP's.

I've mentioned a couple of basic things here in this thread already.

The key factor is whether the person on those incomes has the fortitude to do all those little tight-wad things that are required.

 

That stuff is well known. Stick to the actual subject here. I'm talking about how does one get a loan NOW, given the APRA changes, on 35k. I want details.

 

Like it was before.

Save a deposit, cut back on spending and apply to get a loan. The property you will be looking for will need to be CF positive on day one most likely and if you are handy on the tools you could renovate it to increase equity/rent. Rinse and repeat and you will see your income has grown (including natural growth) which then you can increase your appetite for risk.

APRA has had little effect (so far) on me as I am not a person that was doing 90LVR, I have had no issues getting a loan or shouldn't have any issues getting another one. If I maxed out all my stuff at 90% then yes I can see issues as the banks see it as risky but my deals are far from risky as it would require the property to drop by at least 20% for the bank to have negative equity.

 

That's hilarious sanj. Thanks for the morning smile. NG applies to all asset classes.

"tax law allows you to deduct certain costs from your income that are incurred when borrowing money for investment, provided the investment has been made to produce assessable income. "Negative" gearing comes about when earnings from an investment do not cover the costs associated with that investment.

Simply put, this is all negative gearing is — and is the reason why the concept of negative gearing can be so appealing for many investors, given that there are tax benefits for using someone else's money. The strategy can also be used for investments other than property, such as shares or bonds."​

Borrowing to invest and negative gearing - pros, cons, and how it works

Negative Gearing against personal income was only introduced when Capital Gains Tax was introduced. To restate my position more clearly... Negative Gearing against personal income only exists because Capital Gains Tax exists.

Haha yeah. It is a source of frustration for me too. I would like to see him earning more and paying more tax but it's not really my business. He is one of the old school 'pay no tax at any cost' Australians.

 

Gees. Don't blow a gasket. Nothing exciting and you won't like it. He used his PPoR as security. The loan was taken out last year for another project that didn't go ahead, so he used it to buy half of this property. I realise most people won't have that much equity in a PPoR, so I specifically did not state oh hey, everyone can do this. Just that it can be done.

 

Whatever. "Don't blow a gasket"... I see what you did there....that sort of labeling is well known.

 

"I want details" comes across as demanding. Maybe I am reading your posts less sympathetically than they are intended. Tone is difficult to detect from short posts. They are coming across as distinctly grumpy from my point of view. Nice dodge of the actual topic by the way

 

Yet more labeling. Thanks,I need someone else to tell me what my life is really like.

 

I dont really understand these comments... The regulatory changes from APRA and ASIC arent around LVR's, they are around sensitised assessment rates and increased HEM's. Whether you are seeking to borrow 50% or 90%, it's the new servicing calc policies that are applying a far more strenuous test today than pre regulation @ 12 months ago, which are the issue- not LVR's.

In any event - there are countless threads from myself and other experienced brokers where all of this has already been covered... but I just wanted to make the point that equity, or low LVR's, doesnt determine borrowing capacity

 

Anyway, back on topic?

Is the real issue Negative Gearing or is the real issue the 50% CGT concession? Or is the real issue the way these two policies interact?

When I bought half of a Melbourne investment property in 2007, I did not calculate anything about negative gearing. However, the 50% CGT concession did influence the ownership structure... the property was bought in personal names. I benefited a lot more from the 50% CGT concession than from negative gearing over the years.

I find this interesting because prior to the introduction of the 50% CGT concession, rental properties were generally profitable. Since the introduction of the 50% CGT concession, rental properties have become loss making. The data is very clear on this.


How negative gearing replaced the great Australian dream and distorted the economy | Greg Jericho

Since negative gearing has not changed from 1987 to now, why were rental properties profitable before 1999/2000 and then making huge losses after 2000? It seems like the introduction of 50% CGT concession played a pivotal role. It seems like people are prepared to wear an annual loss on a rental property because they know when they sell they will only have to pay tax on 50% of the capital gain. The combination of the two has made residential property disproportionately attractive.

Negative gearing was not a huge issue before 1999/2000 but appears to be a "huge issue" afterwards. If you consider property investing in Australia "broken", I would not say that negative gearing broke property investing, I would say that the 50% CGT concession broke negative gearing.

 

Apologies for laughing at this comment. You actually raise an important point. I wonder how many other people are not aware that negative gearing applies to shares and other listed securities?

Currently an investor can deduct investment losses from a rental property, shares or other listed securities from there personal income (wage income). Under the tax law, new housing, new shares (floats), existing housing and existing shares are treated equally.

Here are the key points of Labor's policy:

1. Labor will limit negative gearing to new housing from 1 July 2017.
2. This will mean that taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.
   
3. From 1 July 2017 losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities.
4. These losses can also continue to be carried forward to offset the final capital gain on the investment.
5. Labor will halve the capital gains discount for all assets purchased after 1 July 2017.
6. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent.

Positive plan to help housing affordability

A couple of points about this policy. First is that only "new housing" will be able to be negatively geared. Out of new housing, new shares (floats), existing housing and existing shares, this will make "new housing" a preferred asset for some. It is interesting that one of the complaints against the current system is that it discourages investment in business. And yet this policy gives "new housing" preferential treatment above all asset classes.

The other sneaky one is point 4: losses can be carried forward to offset the final capital gain on the investment. This will work in conjunction with point 6, a reduction in the rate of the capital gains tax discount from 50% to 25%.

I wonder which will be more: The current system (negative gearing and the 50% CGT discount) or the proposed system (carrying forward losses and a 25% CGT discount). What do you think @wogitalia? I would love to model some scenarios but I don't have time now

Will carrying forward losses and a 25% CGT discount really be the huge disincentive to invest in existing property that Labor claims? I'm not sure about that.

 

Yeah, one for the naysayers to note: It is CGT, not NG that is more decisive in driving investor behavior! NG is natural in the investment environment, 50% CGT is the introduced incentive.

 

The pension level is based on income and assets test. Rental income will work to reduce the pension level payable. So, NG now can mean less pension or even none later on.

 

Agreed, that's how it hopefully works in theory but in angels case, based on her own declaration, the govt dollars spent on her NG deductions over the years woild be a waste if she ends up on the pension down the track.

 

Agreed that CGT discount does play a significant factor and NG does get a disproportionate % of focus but ultimately NG has a direct effect of improving an investors servicability or ability to invest which woild be an advantage that home buyers would not have. there are certainly valid arguments for the existence of NG but the advantage it gives investors that home buyers don't have is a valid argument against it too considering that investors make up a significantly smaller % of the population than home buyers

 

In additional to shares and bonds, NG also applies to commercial and industrial properties and businesses. Many figures of NG savings on abolishing NG only for residential properties are produced in a cavaliar fashion as the figures do not correspond to the context of the proposal.

 

My point is having income is not a waste. The revenue from rental properties would be taken into consideration and as a result she would be getting less pension than otherwise.

 

I am not sure if any lenders will consider NG for serviceability post APRA. Some might, some don't. When I last went for a loan I was told that AMP no longer considers NG in its servicing calculator. This may have changed. I don't know.

It's interesting that owner occupiers get a 100% CGT discount and investors get a 50% CGT discount but it is considered that investors have the advantage.

Of course the ultimate is to negatively gear your main residence then sell it (within 6 years) 100% CGT free. I wonder if this will still be possible under the Labor proposal?

 

Oh!! I thought working hard, going without, saving for a deposit, buying an IP, dealing with tenants, dealing with vacancies, ... was a relatively new phenomenon.

Nah, that's TOO hard. I want it ALL and I want it NOW.

 

Sorry Kieran but you might need to actually work (both employment/understanding financial management/investing) to get yourself into financial freedom. I know socialist might not agree but at the moment this is the system we have and I cannot foresee a system where people make financial freedom by living off others.

Maybe one day you might be able to enjoy the benefits of financial independence but as you have outlined you will still need to 'work' through dealing with tenants, dealing with vacancies and keeping up with govt legislation as you are never really truly free.

Maybe it is time to call centrelink?