It seems like every man and his dog is calling for negative gearing to get the noose. However, in my opinion there is nothing negative about negative gearing because it has played a wonderful role over the years in helping the government provide affordable housing.
Negative gearing was introduced by the Hawke government in the 1980s as an initiative to encourage income earners to become landlords and, in doing so, support the supply of rental properties. With millions of Australians now owning investment properties, it’s fair to say the initiative has worked a treat.
The appeal of negative gearing into property was enhanced when the Federal Government halved the rate at which capital gains are taxed. This means that property investors, who pay tax at the top marginal rate of 47% (including the Medicare levy of 2%), pay tax on real estate profits at only 23.5%. Ultimately, negative gearing enables you to increase your stake in an asset (over and above what you could afford with your own savings) and this has the potential to produce solid returns.
But on the flipside it can also magnify losses, and this is why you must do your homework before borrowing money to buy an investment property. This involves finding a quality, well-located property that has the potential to produce positive long-term returns. In other words, make the right investment decision first and then consider the tax benefits.