FOUR MYTHS ABOUT NEGATIVE GEARING

Houses

Negative gearing or the process of claiming a tax deduction for losses incurred in renting out a property, is a hot topic in the news at the moment. A lot of what has been published about negative gearing in the mainstream press is misinformed. Here I am going identify some of the myths that are being put out there by the news outlets.

MYTH 1:  Negative gearing pushes up house prices.

This myth seems to be the basis of the ALP Policy. The assumption this policy is based on is that negative gearing increases house prices and the housing market is a fixed market with no new supply. Given we live in a free market economy the only way that house prices can increase is if demand for housing outstrips supply. So the fact is that a limited supply of housing will push up prices not some perceived tax benefit.

Add to the mix foreign investment, and there has been a huge number of foreigners purchasing property in such markets as Sydney and Melbourne, and with local councils around Australia restricting supply there is plenty of evidence to indicate that the increase in the price of housing is not due to negative gearing but to other factors.

MYTH 2: Changes can be made to negative gearing with no impact on the rental market.

As someone who was a young renter during the period 1985 to 1987, which was the time that the Federal government abolished negative gearing entirely, this is absolutely wrong. Anyone trying to rent at that time will remember the doubling and tripling of rents and the mass selloff of investment properties by their owners.

The result of this ill thought out policy was that it was quickly reversed by the then ALP government within 2 years of its introduction. This quick retreat shows that any intervention in the real estate market by government to reduce negative gearing can have a massive impact on people who rent properties.

MYTH 3: People use negative gearing in property to avoid tax.

The reality is that owning an investment property is like owning a small business. You have the constant challenge of keeping your customer, the tenant, happy and you have a whole list of expenses associated with the investment property to manage. For many property investors, who are normal wage earners, becoming a landlord leads to a dramatic increase in stress and worry as they are not used to the ups and downs of owning what is effectively a small business.

People don’t buy a small business to avoid tax. There are other methods to use if you want to reduce your tax. Owning an investment property is for all intents and purposes the same as owning a business and means it would not be logical to purchase an investment property just for the tax deduction.

MYTH 4: Other countries do not allow you to claim tax deductions on your mortgage.

In Australia only mortgages used to purchase investment property are allowed a tax deduction. In most other countries around the world that use mortgages to purchase real estate there is a provision for some sort of tax relief. It can be for mortgages used to purchase owner occupied homes such as in the USA or for investment such as Canada, Sweden and the UK.

Income tax systems can differ quite markedly between different countries and so when the mainstream media tell us other countries do not have “negative gearing” they are being economical with the truth.House2

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