Noel Whittaker is the author of Wills, Death & Taxes Made Simple and numerous other books on personal finance. Email: [email protected]

Negative gearing is back in the spotlight, with several proposals to alter how property tax deductions work. Suggestions include banning negative gearing for properties altogether or limiting it to just two properties.

Advocates of these changes argue that current rules provide investors with an unfair tax advantage while locking first-home buyers out of the market. But these claims don't hold water. Negative gearing is not a huge tax loophole. Most property investors fall into the 30% tax bracket, meaning the government covers 30% of any loss, and the investor bears 70%. That’s far from a tax rort. Plus, many of these losses are due to non-cash deductions like depreciation, which are recouped when the property is sold.

It’s crucial to consider how any changes would be implemented. No government heading into an election would eliminate tax deductions for existing rental properties. Any new rules would need to be grandfathered, which would discourage existing investors from selling and deter potential investors from buying. It’s a zero-sum game. The real cause of the housing unaffordability crisis is a rising population, which is fuelling demand.

Who is really to blame? Image Credit: Shutterstock

There’s been much talk about what happened when Paul Keating changed the rules back in 1985, but people seem to forget that interest was still deductible – investors could ‘quarantine’ their rental property losses. While they couldn't offset these losses against other income to reduce their tax bill in the current year, they could carry forward the losses and apply them to future rental income or capital gains from the sale of the property.

So the losses weren't completely disallowed: they were deferred. Investors had to wait to benefit from the deductions until they had future rental income or sold the property, at which point the quarantined losses would be used to reduce tax liabilities.

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Quisque in diam id erat facilisis consectetur vitae vel urna.

Ut lacus libero, suscipit auctor ipsum sit amet, viverra pretium nisl. Nullam facilisis nec odio nec dapibus. Integer maximus risus et velit porttitor ullamcorper

Read more for FREE!

Become a member today and join over 200,000 Australians already taking advantage of daily news, weather, petrol costs, games, jokes, deals and more.

• 

  FREE 400-page Discount eBook upon joining

• 

  FREE Aussie-made eBook & many more

• 

  Multiple daily discounts for members

• 

  No payment required

Register Faster Using

• Continue with Facebook
• Continue with Google
• Continue with Apple

Or Register with email

Join the club

Already a member?

Log In

[Jan A]

Property investors are now subject to such high taxes and costs that investment properties are a much less worthwhile prospect.

To begin, buying a property hits the buyer with the crippling tax on homes known as stamp duty. Today in the capital cities, that cost could amount to a person’s entire salary for a year.

Then there is the payment of council rates. Some councils charge higher rates to non-resident owners.

Interest rates are a major factor. When interest rates go up, investors have more expenses that are reflected in higher rents. Because the tenants have a lease at a specified rental cost, it could be up to a year before the owner can raise the rent to cover increases in bank interest.

Then there is land tax, a huge State tax imposed on investors who own more than one property in the same State. When the value of the properties exceeds a specified amount, they are charged thousands of dollars in land tax. [Note: if you still want to invest, buy properties in different States to avoid this tax burden.]

Let’s not forget all the maintenance to the property. Costs for any work of this kind have skyrocketed in recent years, as anyone trying to get work done on their house knows only too well. Just finding a tradesperson who can do the work in a reasonable time is difficult, even moreso if you have a property outside the cities.

We need to include landlord’s insurance to safeguard against costs caused by damage to the property or by tenants skipping out while owing rent.

Some States have special requirements on investment properties. For example, in Queensland, fire alarms must be inspected annually at a cost to the investment property owner of almost $1,000 each year (the last time I looked). It is a good thing to have fire alarms checked but providers can charge high prices because the check is compulsory.

If you buy an apartment, you are subject to the quarterly fees which can be raised at any time. To this amount, we add any major works that may come up, such as replacing a fire alarm system or painting the common areas. If the building develops major structural issues, the cost of fixing them could be astronomical. Renters can walk away but the owner is left with a potential major financial loss.

Finally and most importantly, when you sell your investment property, the federal government charges Capital Gains Tax (CGT) at a 15% tax rate. There is no deduction for the expenses the owner has had during the course of their investment, no recognition that they have provided rental properties for the community and no allowance for how long they have kept the property. On the average property in Sydney, CGT could amount to something in the order of $100,000.

It is no wonder why investment property owners are selling and getting out of the market. What used to be a good investment that benefitted the owner and the renters has now become much less of an option. Building up a term deposit in a bank where interest comes in with no inconvenience to the deposit holder seems like a much better option. You still pay tax on the interest but you do not have the expenses of an investment property. Other forms of investment provide results without the drama. Take care to be sure they are a safe investment, not a risky prospect that promises enormous returns for little outlay. Sure ruin lies down that road.

The end result is a scarcity in available rental properties. Those that are available have high rents partly because there are fewer of them and partly because the expenses to owners are now so high. The government may claim to be taking action about the rental situation but they are not about to address the root cause of the problem, which is the high taxes imposed on owners. They get too much out of it to make a change.

 

[UNIT1000]

Property investors are now subject to such high taxes and costs that investment properties are a much less worthwhile prospect.

To begin, buying a property hits the buyer with the crippling tax on homes known as stamp duty. Today in the capital cities, that cost could amount to a person’s entire salary for a year.

Then there is the payment of council rates. Some councils charge higher rates to non-resident owners.

Interest rates are a major factor. When interest rates go up, investors have more expenses that are reflected in higher rents. Because the tenants have a lease at a specified rental cost, it could be up to a year before the owner can raise the rent to cover increases in bank interest.

Then there is land tax, a huge State tax imposed on investors who own more than one property in the same State. When the value of the properties exceeds a specified amount, they are charged thousands of dollars in land tax. [Note: if you still want to invest, buy properties in different States to avoid this tax burden.]

Let’s not forget all the maintenance to the property. Costs for any work of this kind have skyrocketed in recent years, as anyone trying to get work done on their house knows only too well. Just finding a tradesperson who can do the work in a reasonable time is difficult, even moreso if you have a property outside the cities.

We need to include landlord’s insurance to safeguard against costs caused by damage to the property or by tenants skipping out while owing rent.

Some States have special requirements on investment properties. For example, in Queensland, fire alarms must be inspected annually at a cost to the investment property owner of almost $1,000 each year (the last time I looked). It is a good thing to have fire alarms checked but providers can charge high prices because the check is compulsory.

If you buy an apartment, you are subject to the quarterly fees which can be raised at any time. To this amount, we add any major works that may come up, such as replacing a fire alarm system or painting the common areas. If the building develops major structural issues, the cost of fixing them could be astronomical. Renters can walk away but the owner is left with a potential major financial loss.

Finally and most importantly, when you sell your investment property, the federal government charges Capital Gains Tax (CGT) at a 15% tax rate. There is no deduction for the expenses the owner has had during the course of their investment, no recognition that they have provided rental properties for the community and no allowance for how long they have kept the property. On the average property in Sydney, CGT could amount to something in the order of $100,000.

It is no wonder why investment property owners are selling and getting out of the market. What used to be a good investment that benefitted the owner and the renters has now become much less of an option. Building up a term deposit in a bank where interest comes in with no inconvenience to the deposit holder seems like a much better option. You still pay tax on the interest but you do not have the expenses of an investment property. Other forms of investment provide results without the drama. Take care to be sure they are a safe investment, not a risky prospect that promises enormous returns for little outlay. Sure ruin lies down that road.

The end result is a scarcity in available rental properties. Those that are available have high rents partly because there are fewer of them and partly because the expenses to owners are now so high. The government may claim to be taking action about the rental situation but they are not about to address the root cause of the problem, which is the high taxes imposed on owners. They get too much out of it to make a change.

now you have told me soumthing i was not awear of

 

[UNIT1000]

thank you sir

 

[mylittletibbies]

Property investors are now subject to such high taxes and costs that investment properties are a much less worthwhile prospect.

To begin, buying a property hits the buyer with the crippling tax on homes known as stamp duty. Today in the capital cities, that cost could amount to a person’s entire salary for a year.

Then there is the payment of council rates. Some councils charge higher rates to non-resident owners.

Interest rates are a major factor. When interest rates go up, investors have more expenses that are reflected in higher rents. Because the tenants have a lease at a specified rental cost, it could be up to a year before the owner can raise the rent to cover increases in bank interest.

Then there is land tax, a huge State tax imposed on investors who own more than one property in the same State. When the value of the properties exceeds a specified amount, they are charged thousands of dollars in land tax. [Note: if you still want to invest, buy properties in different States to avoid this tax burden.]

Let’s not forget all the maintenance to the property. Costs for any work of this kind have skyrocketed in recent years, as anyone trying to get work done on their house knows only too well. Just finding a tradesperson who can do the work in a reasonable time is difficult, even moreso if you have a property outside the cities.

We need to include landlord’s insurance to safeguard against costs caused by damage to the property or by tenants skipping out while owing rent.

Some States have special requirements on investment properties. For example, in Queensland, fire alarms must be inspected annually at a cost to the investment property owner of almost $1,000 each year (the last time I looked). It is a good thing to have fire alarms checked but providers can charge high prices because the check is compulsory.

If you buy an apartment, you are subject to the quarterly fees which can be raised at any time. To this amount, we add any major works that may come up, such as replacing a fire alarm system or painting the common areas. If the building develops major structural issues, the cost of fixing them could be astronomical. Renters can walk away but the owner is left with a potential major financial loss.

Finally and most importantly, when you sell your investment property, the federal government charges Capital Gains Tax (CGT) at a 15% tax rate. There is no deduction for the expenses the owner has had during the course of their investment, no recognition that they have provided rental properties for the community and no allowance for how long they have kept the property. On the average property in Sydney, CGT could amount to something in the order of $100,000.

It is no wonder why investment property owners are selling and getting out of the market. What used to be a good investment that benefitted the owner and the renters has now become much less of an option. Building up a term deposit in a bank where interest comes in with no inconvenience to the deposit holder seems like a much better option. You still pay tax on the interest but you do not have the expenses of an investment property. Other forms of investment provide results without the drama. Take care to be sure they are a safe investment, not a risky prospect that promises enormous returns for little outlay. Sure ruin lies down that road.

The end result is a scarcity in available rental properties. Those that are available have high rents partly because there are fewer of them and partly because the expenses to owners are now so high. The government may claim to be taking action about the rental situation but they are not about to address the root cause of the problem, which is the high taxes imposed on owners. They get too much out of it to make a change.

Very well said. The average person has no idea of what is involved in owning a rental property.
For every good tenant there are a dozen bad ones. It is no wonder people are turning away from investment properties and turning to shares.
Too many rules in favour of the tenant are also making the whole situation ridiculous.
Example, tenants bring allowed to repaint. Tenants are not qualified painters and should not be allowed to redecorate a property that they do not own.
Owners should be allowed to decide whether or not pets are allowed.
We allowed our tenant to have a dog, under duress.
They ended up with three
Complaints from neighbours, dogs were let inside, against the lease agreement. Carpets were pissed on and needed replacing, doors were scratched, skirtings chewed, curtains ripped and a yard full of dog crap when we finally managed to get them out. The bond nowhere near covered the losses and tenant insurance didn't cover most of the damage either.
I feel sorry for the good tenants as more and more investors pull out, there will be less and less properties available and rents will keep going up.

 

[Ebby]

Very well said. The average person has no idea of what is involved in owning a rental property.
For every good tenant there are a dozen bad ones. It is no wonder people are turning away from investment properties and turning to shares.
Too many rules in favour of the tenant are also making the whole situation ridiculous.
Example, tenants bring allowed to repaint. Tenants are not qualified painters and should not be allowed to redecorate a property that they do not own.
Owners should be allowed to decide whether or not pets are allowed.
We allowed our tenant to have a dog, under duress.
They ended up with three
Complaints from neighbours, dogs were let inside, against the lease agreement. Carpets were pissed on and needed replacing, doors were scratched, skirtings chewed, curtains ripped and a yard full of dog crap when we finally managed to get them out. The bond nowhere near covered the losses and tenant insurance didn't cover most of the damage either.
I feel sorry for the good tenants as more and more investors pull out, there will be less and less properties available and rents will keep going up.

My daughter and hubby rented their house years ago while they went on a holiday. Renters stopped paying rent and it took a year or so to get them out.
When we lived next door to two guys with two German Shepherds they got notice to leave after not paying the rent.They did as much damage to the house as they could and left the dogs shut in so they would mess everywhere. Heard the bond didn't begin to cover lost rent and all the damage.We were surprised because we had spoken to these guys several times and although they were a bit rough round the edges seemed ok

 

[mylittletibbies]

My daughter and hubby rented their house years ago while they went on a holiday. Renters stopped paying rent and it took a year or so to get them out.
When we lived next door to two guys with two German Shepherds they got notice to leave after not paying the rent.They did as much damage to the house as they could and left the dogs shut in so they would mess everywhere. Heard the bond didn't begin to cover lost rent and all the damage.We were surprised because we had spoken to these guys several times and although they were a bit rough round the edges seemed ok

You just never know

 

[GillyH]

Very well said. The average person has no idea of what is involved in owning a rental property.
For every good tenant there are a dozen bad ones. It is no wonder people are turning away from investment properties and turning to shares.
Too many rules in favour of the tenant are also making the whole situation ridiculous.
Example, tenants bring allowed to repaint. Tenants are not qualified painters and should not be allowed to redecorate a property that they do not own.
Owners should be allowed to decide whether or not pets are allowed.
We allowed our tenant to have a dog, under duress.
They ended up with three
Complaints from neighbours, dogs were let inside, against the lease agreement. Carpets were pissed on and needed replacing, doors were scratched, skirtings chewed, curtains ripped and a yard full of dog crap when we finally managed to get them out. The bond nowhere near covered the losses and tenant insurance didn't cover most of the damage either.
I feel sorry for the good tenants as more and more investors pull out, there will be less and less properties available and rents will keep going up.

I have been a landlord in the past, for 17 years, you certainly earn your rental money. The tenant always comes 1st so my own home was neglected for many years.

 

[beauravn]

Why is this all about property investors and renters? Surely reducing the number of investors building property portfolios is EXACTLY what's needed for young, buyers to buy their first, and possibly only, home. Anything that reduces the cost of buying a home for young, first-home buyers, as well as bringing down house prices in general, needs to be encouraged and supported before tax incentives for people buying investment properties in my opinion. Needless to say, I'm a supporter of axing negative gearing completely, as well as minimising tax burdens for first home buyers, but I'm probably in the minority here, lol.

"if large numbers sell their properties to owner occupiers, rents will go up for the remainder." - I think this is rubbish. If large numbers of investors sell their properties to owner-occupiers, the bottom will fall out of the 'investment property' market and the cost of buying a house will go down. This is a GOOD thing, not a 'BAD' thing (except for property investors who need to shift into the share market anyway). Rents will just remain stable because the remaining investors won't want to lose good, long-term tenants.

 

[Phantom55]

Absolutely ...neg gearing in my case is practically compulsory, its matter of buy real estate and rent your paid for home and move in (in many cases not req.) and receive a negative gearing that equates to either pay tax or buy an investment property have done this for the past 25 years and no problems with taxation it comes down to this buy a house or pay the same amount to tax office, its better than super

 

[Phantom55]

Why is this all about property investors and renters? Surely reducing the number of investors building property portfolios is EXACTLY what's needed for young, buyers to buy their first, and possibly only, home. Anything that reduces the cost of buying a home for young, first-home buyers, as well as bringing down house prices in general, needs to be encouraged and supported before tax incentives for people buying investment properties in my opinion. Needless to say, I'm a supporter of axing negative gearing completely, as well as minimising tax burdens for first home buyers, but I'm probably in the minority here, lol.

"if large numbers sell their properties to owner occupiers, rents will go up for the remainder." - I think this is rubbish. If large numbers of investors sell their properties to owner-occupiers, the bottom will fall out of the 'investment property' market and the cost of buying a house will go down. This is a GOOD thing, not a 'BAD' thing (except for property investors who need to shift into the share market anyway). Rents will just remain stable because the remaining investors won't want to lose good, long-term tenants.

Absolutely correct....but remember a lot of pollies have rental houses , the landlords of today have dollar signs in their eyes, and regard the rent as nett when it is actually gross. try treating tenants as valued customers (not employees) and treat them right it works ...I refund 2 week\ks rent along with a card at xmas if rents and care are on time with my compliments as a goodwill gesture, it works 99% of the time...(and its a lot cheaper than landlord insurance ) I promise `a cheque for 2 weeks rent is very gratefully received and is good PR

 

[Phantom55]

ABSOLUTELY buying a 2nd house is as good as a job your only outlay is the deposit (most houses have enough equity for a deposit for a house and readily available are renters to pay it off for you...why work?

 

[mylittletibbies]

Absolutely correct....but remember a lot of pollies have rental houses , the landlords of today have dollar signs in their eyes, and regard the rent as nett when it is actually gross. try treating tenants as valued customers (not employees) and treat them right it works ...I refund 2 week\ks rent along with a card at xmas if rents and care are on time with my compliments as a goodwill gesture, it works 99% of the time...(and its a lot cheaper than landlord insurance ) I promise `a cheque for 2 weeks rent is very gratefully received and is good PR

Perhaps you've been lucky and have good tenants
I also have been extremely good to my tenants. The ones with the dogs I spoke about before.
They were a young couple expecting a baby with nowhere to live.
I let them have my four bedroom furnished home for $350/week free water and I paid the first $400 of the electricity bill. They didn't have enough for the bond so I only took $500.
I fell for their sob story, more
fool me, I should have known better
I could have easily charged $600/week without the perks
It cost more than the bond just to have the yard cleaned up after the dogs.
It didn't take long for the rent to stop, the electricity bill never got paid, most of the furniture had to be disposed of, the carpets and curtains replaced,house fumigated, two internal doors had been kicked in and that's not half of it.
On a previous beautiful Federation home we had
renovated we had an agent lumber us with two bad tenants in a row. Result $137,000 capital loss. So much for good tenants, they are few and far between .If you are lucky enough to have them treat them like gold

No more rentals for me.

 

[Cheezil]

NW for PM! Wise thoughts, a shame those that matter don't take notice of reality!
Oh & why the huge population growth? 500,000 immigrants per year who need a place to live (& often getting/occupying emergency/public housing!!) is perhaps stretching things to add to the already desperate situation!!
Hhhmm but no they wont listen to anything

 

[Cheezil]

Very well said. The average person has no idea of what is involved in owning a rental property.
For every good tenant there are a dozen bad ones. It is no wonder people are turning away from investment properties and turning to shares.
Too many rules in favour of the tenant are also making the whole situation ridiculous.
Example, tenants bring allowed to repaint. Tenants are not qualified painters and should not be allowed to redecorate a property that they do not own.
Owners should be allowed to decide whether or not pets are allowed.
We allowed our tenant to have a dog, under duress.
They ended up with three
Complaints from neighbours, dogs were let inside, against the lease agreement. Carpets were pissed on and needed replacing, doors were scratched, skirtings chewed, curtains ripped and a yard full of dog crap when we finally managed to get them out. The bond nowhere near covered the losses and tenant insurance didn't cover most of the damage either.
I feel sorry for the good tenants as more and more investors pull out, there will be less and less properties available and rents will keep going up.

Yes these things certainly have deterred me from ever leasing out my much loved & only home (was hoping to travel & rent it out, but certainly not something I'd consider again due to the bad stories- as you put it, 1 good in 12 is not a risk ratio worth taking for me!)

 

[mylittletibbies]

Yes these things certainly have deterred me from ever leasing out my much loved & only home (was hoping to travel & rent it out, but certainly not something I'd consider again due to the bad stories- as you put it, 1 good in 12 is not a risk ratio worth taking for me!)

Why is this all about property investors and renters? Surely reducing the number of investors building property portfolios is EXACTLY what's needed for young, buyers to buy their first, and possibly only, home. Anything that reduces the cost of buying a home for young, first-home buyers, as well as bringing down house prices in general, needs to be encouraged and supported before tax incentives for people buying investment properties in my opinion. Needless to say, I'm a supporter of axing negative gearing completely, as well as minimising tax burdens for first home buyers, but I'm probably in the minority here, lol.

"if large numbers sell their properties to owner occupiers, rents will go up for the remainder." - I think this is rubbish. If large numbers of investors sell their properties to owner-occupiers, the bottom will fall out of the 'investment property' market and the cost of buying a house will go down. This is a GOOD thing, not a 'BAD' thing (except for property investors who need to shift into the share market anyway). Rents will just remain stable because the remaining investors won't want to lose good, long-term tenants.

If you read the article again carefully, you will see Neil Whittaker explains quite
clearly why what you suggest is not a good idea.
It is not the property investors causing the problem, without them you will have no rentals.
There will always be a large percentage of the population that will rent, no matter how cheap houses are.
I bought my first home back in the 70s when properties were much more reasonable. Still there are many of our age group, due to life circumstances, who do not own there own home.
Scare investors out of the property market and where will these people live.
It's the immigration policy of this country, where demand is outstripping supply that is causing this problem and forcing prices, and in turn rents to keep increasing.
The answer is definitely not forcing investors out of the market. That will only cause people who actually do have a rental onto the street.
Not everybody is in a position to buy a home and renters should not be penalised in favour of first homebuyers.

 

[Cheezil]

S

If you read the article again carefully, you will see Neil Whittaker explains quite
clearly why what you suggest is not a good idea.
It is not the property investors causing the problem, without them you will have no rentals.
There will always be a large percentage of the population that will rent, no matter how cheap houses are.
I bought my first home back in the 70s when properties were much more reasonable. Still there are many of our age group, due to life circumstances, who do not own there own home.
Scare investors out of the property market and where will these people live.
It's the immigration policy of this country, where demand is outstripping supply that is causing this problem and forcing prices, and in turn rents to keep increasing.
The answer is definitely not forcing investors out of the market. That will only cause people who actually do have a rental onto the street.
Not everybody is in a position to buy a home and renters should not be penalised in favour of first homebuyers.

Spot on tho Noel cautiously stopped one step short re immigration but pretty sure it's what he'd be alluding to