Tax deduction

The evils of Negative Gearing?

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article_05082013Barely a day goes by in the media that there isn’t an article published discussing the challenges of the Australian housing market and how much prices have risen over recent years. The long held ‘Great Australian Dream’ of owning your own home is frequently trotted out to tug at the heart strings of TV viewers when trying to find a suitable scapegoat for sky high property prices. Throughout much of 2014, focus was being placed on foreign investors landing on our shores with suitcases full of money and pricing us locals out of the market. Currently the place for blame is on negative gearing. Whilst I’m happy to agree that negative gearing may have had some contribution to price rises, it’s important to take into account the huge amount for factors at play here. Although I’m no economist, it doesn’t take a genius to realise that the combination of negative gearing, foreign investment, historically low interest rates, ease of finance, ongoing agent under-quoting and the sense of urgency portrayed in the media all play a role. Not to mention the fact that almost 70% of Australians choose to live in capital cities and that there is only so much land available in these relatively tiny pockets of our enormous country. Geography and demographics certainly play a role.

Of course I’m biased…but while I do think that negative gearing has an important role to play in supporting investors and in turn the housing market in Australia, I agree with statements made regarding investors only investing in property simply for the tax advantages. To me, purely investing for the benefits of negative gearing is completely the wrong approach (although plenty do it). Following here are two videos worth a watch. The first is a clip from ‘The Project’ on Network 10 which aired last night and fired me up to write about this topic. Pay careful attention to the generalised statements and overall tone of the clip, it’s enough to make you go out and push the nearest property investor under a bus. The second clip by well known Australian property investing wunderkind Nathan Birch is intriguingly entitled Negative Gearing Sucks Balls. Nathan’s explanation about negative gearing and why people get caught out by it is spot on in my view. My thoughts? Negative gearing is a useful bonus for investors but certainly not a reason in itself to invest in property. Check out the clips below and make up your own mind!

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The New Build – Part 1

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Yarra1Yarra2So it’s been a while since I’ve posted a blog about what’s been happening in my world with regards to property. Whilst the major activity for 2014 may have appeared to be the renovation rescue, there was something else going on in the background that had started well before I signed on the dotted line for the reno property; a new place, built from scratch! In late 2013 a new and exciting part of the property journey commenced with contracts signed to build a new 2 bedroom townhouse in a suburb of Ballarat called Sebastopol. All of the properties purchased so far have all been established homes aged between 10 and 40 years old and although they have all been very successful there are certain benefits (and some drawbacks) to buying off the plan and building something new.

  • Firstly, you get everything brand new and one would hope that it means things work, it looks modern, attracts good rent and requires minimal maintenance as it has new appliances and services.
  • Secondly, a new property brings with it substantial depreciation benefits at tax time. With the older properties you can claim depreciation on the fixtures and fittings within the property (carpets, curtains, heaters etc) but if a property is built after July 1985 then you can also claim depreciation on the actual building itself. This can make a significant difference with your tax return and subsequently how you manage the cash flow on your investment. (Check out this previous post for an overview of depreciation).
  • Thirdly, you can manage to save significant money with a reduction in the stamp duty that you pay on the purchase of the property. When purchasing off the plan the stamp duty is calculated on the property value when the contracts are signed. For a property such as this it’s based on a vacant block of land with nothing built on it so is a lot less than if it was an already established home.
  • On the flip side, a major drawback with a new build is the amount of time that it takes. The contacts were finalised in December of 2013 for this property and with a scheduled start date of Feb 2014 for building it ended up being pushed into the second half of the year due to demolition issues with a house that was already on the land. The anticipated settlement is April/ May of this year (I’m expecting May).
  • Another thing that would work for some and not others is that you have little (practically none at all) scope to make any alterations to the design of the property itself. I certainly don’t mind though as it’s a good design and a build for investment, not to live in. That said, you do get a selection of interior options regarding cabinetry, paint, carpets etc.

So activity started in the second half of 2014 and I’ve been regularly stalking the builders to track progress. Keep an eye on future posts to see how the build progressed and if it looks anything like the pictures above!

What’s on the horizon for negative gearing?

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symbol-upward-arrow-house_002So it’s federal budget night in Australia and there have been rumblings for some time now that the government might be looking to reform their negative gearing policy for property investors. The most frequent suggestion that I have heard is regarding the possibility of introducing grandfathering arrangements for current property investors whilst restricting any future negative gearing to newly constructed properties. Whilst this has the potential to save the government billions of dollars, there is still plenty of debate as to the flow-on effects that it might have. Whilst on one hand there are those stating that negative gearing has done nothing but escalate property prices for those wanting to purchase their own home (Check out the beer coasters here that encourage abolishing negative gearing), others view it as a key strategy in encouraging investment and maintaining a healthy supply of rental properties on the market. Time will tell after the budget announcement tonight and you can rest assured that whatever happens it won’t please everyone. Check out the links below to read some of the recent commentary on the potential impact on negative gearing in the 2014 budget. Stay tuned!

Negative gearing is on the chopping-block

Budget Night: What’s Going To Happen To Negative Gearing?

REIA response to Renovating Housing Policy

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logoFollowing on from my post this week regarding the Grattan Institute Report on housing policy it’s not surprising that the Real Estate Institute of Australia (REIA) has responded quickly to the recommendations in the report. Published this week on the Your Investment Property website is the following article outlining the response from the REIA. Once again it’s always fascinating to see the debate it stirs up in the comments posted after the article. You can access the original article here, or, read below.

Hands Off Negative Gearing, Warns REIA

A report issued earlier this week slamming government housing policies has provoked a strong reaction from the Real Estate Institute of Australia (REIA), which said a recommendation to scrap negative gearing is ‘short-sighted’.

The REIA said it agrees with the Grattan Institute Renovating Housing Policy report in that a major overhaul of housing policy in Australia is needed, but disagreed with what needs to be done.

“We strongly agree with the report’s recommendations to eliminate stamp duties, however it’s essential negative gearing be retained in its current form for the purpose of property investment,” said REIA president Peter Bushby

“REIA has always supported negative gearing because it helps in the provision of rental accommodation. Negative gearing for property investment is complementary to the goals of the Government’s Housing Affordability Fund (HAF) in addressing the supply of rental accommodation.”

Bushby said removing negative gearing would show that Australians ‘haven’t learnt anything from history’.

“When negative gearing was abolished in 1985 it had disastrous consequences for the property market and for people trying to rent. Rents rose 37% across Australia and by 57% in Sydney.

“Thankfully, negative gearing was reinstated in 1987. It is far too short-sighted to link investor interest in housing to negative gearing alone. Negative gearing is only one of a range of factors that contribute to the level of investment in property. Other factors include interest rates, availability and accessibility of finance, share market performance, the unemployment rate, housing supply and consumer confidence.”

Bushby said the ‘myth’ that negative gearing is a plaything of the well-heeled also needs to be dispelled. He claims the majority of taxpayers with negatively geared property earn less than $80,000 per annum.

“Findings in the Renovating Housing Policy report are important and let’s hope they assist in kick-starting a debate on housing policy. With the new government, expectations that industry will be involved in finding workable solutions to these old issues are high.”

http://www.yourinvestmentpropertymag.com.au/article/hands-off-negative-gearing-warns-reia-180767.aspx

The mysteries of depreciation

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One of the things that has taken me a long time to understand when it comes to investing is property depreciation and how it works with your income and particularly around tax time. I just sat through a webinar this evening (note my previous post about being willing to learn and becoming a student again) and it reminded me how challenging it was for me to get my head around it but also how beneficial it was once I knew about being able to utilise property depreciation to claim ‘non-cash’ deductions on your investment property come tax time.

In a nutshell it basically means that the cost of the property itself (both the building and the fixtures inside it) decrease in value over time, essentially it’s talking about wear and tear over the years. In Australia (I’m not sure about other countries) the tax office allows for legitimate deductions taking into account this decrease in value of the property and it’s fixtures each year. In the webinar it was stated that as much as 80% of investors are not claiming as much as they could be on these non-cash deductions each year. I certainly realised this a few years ago when I had a full depreciation schedule done on one of my properties. I was pretty pleased when the report outlined the amount that I could claim. The thing is however that you need to get a qualified quantity surveyor to prepare the report as that is all the tax office will accept. You’ll need to spend some time looking around to find the right person to do this for you. Don’t hesitate to compare and ask several surveyors about what they can do and the costs associated.

I’d certainly encourage all investors new or old to learn more about depreciation and how it can apply to your own circumstances, it can make an amazing difference to what you can claim against your investments and potentially a nice improvement on your tax return. The YouTube video below is from an Australian company (the ones that conducted the webinar) and I’d say is worth a look. This company is just one of many and I’d encourage you to look around and find one that suits your own needs.