How would you get rid of negative gearing? You couldn't do it instantly, all at once. People have made financial decisions based on it. You could say "no negative gearing on properties purchased after 2023", but then you would still have a huge problem of existing negative gearing. You could phase it out. Limits on how much you can negative gear that reduces every year, going to zero in 20 years.
It's a funny beast, but I don't know that getting rid of it is the right call. I don't think it'd chage anything much:
Ms Jones has a house that she leases out to tenants. The interest on the mortgage and costs on the hosue amount to more than she collects in rent. That difference is tax deductible under the status Quo (Negative Gearing). The law changes, and you can no longer negatively gear property.Ms Jones starts a new company (TotesLegitLandlord inc) and sells her property to this company that she happens to own. This company leases out a house to tenants. The Interest on the business loan and the costs on the house amount to more than the company collects in revenue. The company makes no profits and pays no tax.
Negative Gearing just makes this whole process easier for everyone. Tax returns are easier and the ATO isn't reviewing several thousand small businesses that are leasing out properties at a loss. It's a bogeyman talking point getting us arguing with each other while Billion-dollar companies transfer all their profits off-shore and pay no tax. That's the scandal that we should be marching in the streets over.
I think if the company makes no profit and pays no tax that's fine. The problem people have with negative gearing is that it offsets non investment income. So Ms Jones now pays less income tax on her salary.
It offsets personal income by the difference between what the property costs and what it brings in for rent. We need an accountant to chime in here. If Ms. Jones invests money into her business to keep it going (since costs are outweighing income), is that money still income? Or would it be deductible as well?
Either way, that amount isn't a going to be more than the rental income. And under either model the rent income isn't taxed until the property is generating more rent than its outgoings. Once that happens, it's time to buy the next property and go back into the red. It feels like s ponzi scheme, doesn't it?
I see the problems. I just don't know how to fix them.
You don’t seem to see the problem at all, the goal of removing negative gearing is to force people to sell, what that means to their personal finances is immaterial
That’s why you also need to reform the corporations act to ban corporate ownership of residential real estate.
Give until the end of the financial year. Negative gearing is a speculative investment, if you’re negative gearing your only residence then more fool you.
I think the focus on negative gearing is a bit of a distraction. As many have pointed out, properties are only negatively geared because they are losing money, which makes them looks like poor investments in the first place.
What people miss is on a whole, property actually makes money through capital gains on sale of the property, which will easily offset any of the operating cost that's been accrued. Note though double dipping doesn't happen because what has been deducted on negative gearing is taken away from the initial value of the property, thereby attracting more capital gain tax at the end.
The primary problem is, land value and hence property value naturally rises over time and is unavoidable. As cities grow, they spread out or they get more dense. Therefore an single property will be demanded by more people as it closer than more properties (as cities spread, or more city centres crop up nearby), and lower density than nearby buildings (as density of the area grows). No amount of anger will change the fact that land is a scarce resource, particularly convenient land. And so that price signal is important to allow that land to be used as efficiently as possible (you couldn't want a giant farm near a CBD when it could house and cut commute costs for 50k people).
What we really should be doing is discouraging profiting off this natural and unproductive growth in value. Perhaps this could take the form of having a different capitals gain tax tier explicitly for residential properties. The other aspect is changing the primary residence exemption to be that you have to have lived in the property for at least 50% of the time you've owned it for, rather than just the last 12 months. Though overall, this would need to be designed carefully to prevent disadvantaging people who are simply wanting to upsize, or simply to relocate to an equivalent location.
I thought the central "lie" of negative gearing was that landlords could spend money improving their properties, claim the rent received on said property could never cover the cost of said improvements but in reality be accruing massive capital gains on said property - which will never be taxed until the sale of the property. In the meantime the money spent on these improvements can reduce the owner's income tax, potentially to zero, despite the owner accruing massive wealth (via increases in property value intrinsic to the market and extrinsic via the improvements made to said property) that will not be taxed. Am I missing something?
In that case, if the renovation wasn't deducted off primary income by negative gearing, it would be deducted off the CGT tax when the property is sold as it could count as a capital expense.
https://www.ato.gov.au/Individuals/Capital-gains-tax/Property-and-capital-gains-tax/CGT-when-selling-your-rental-property/#Capitalexpenses
IF the property is sold. In the meantime little or no tax is paid by the owner, and millions of people are priced out of the market. The owner however can borrow against the higher estimated value of their property and purchase more property to pull the same moves again. Wealth concentrates towards the rich, inequality increases.
I'm not sure what point you're making, but someone sitting on 10 properties with a total networth of $20M cannot spent any of that until they sell the property. That's $20M is on paper wealth. That $20M only becomes real wealth when they sell up, at which point it attracts CGT.
