A lot of mortgage brokers and financial advisors in the Kwinana area seem to be encouraging their clients to use negative gearing for its tax benefits when purchasing investment property. While we can’t give any individual advice without knowing your situation, we can say that a lot of experts are not enamoured with negative gearing. To the contrary, many economists and financial “experts” believe that it has a negative effect on the economy.
What is Negative Gearing?
The concept of negative gearing is simple. If the costs of paying for and maintaining a property exceed the amount of rent collected, the property is said to be negatively geared. Standard costs for a rental property include interest on the mortgage (usually an interest-only mortgage), maintenance, repairs and property management fees.
The difference between expenses and rent are subject to tax benefits. This not only helps small investors break into the market, but can attract them. According to the Reserve Bank of Australia (RBA), approximately 34% of home loans are investor loans.
What Economists Say about Negative Gearing
While many investors love negative gearing, economists paint a gloomier picture. Many economists cite the fact that negative gearing tax breaks cost the Australian Economy as much as $5 billion a year. Some economists feel that these tax breaks raise real estate prices, thus making it more difficult for the first home buyer to enter the market.
According to the Chief Economist of Bank of America Merrill Lynch, Saul Eslake, the Government should not give the tax breaks to new investors. His rationale is that the demand investors are causing for established properties would be reduced, thus reducing the prices. Mr Eslake believes that lower prices for established properties would allow first home buyers easier entry into the housing market.
Call Smartline Rockingham
To discuss your individual financial situation and suitability for investment property, call a business finance broker in our Rockingham office: (08) 9527 1800.
