Negative gearing, not what I thought it was.

[want2bewealthy]

So, after years in the game, all the big talk about negative gearing seems like quite a nice deduction, ofcourse no reason to invest to make a loss but still a nice cashflow tool for investors,

I never knew that when you make a loss and claim the deduction you are only delaying the process of having to pay it back if you ever sell (which is why I like the idea of never selling)

Why is this not common knowledge? why did it take me 2 years to discover? Ive read loads of books on the subject but only one of the books (0-130 properties) made the fact known to me.

Can anyone explain how this works in detail?

 

[Pushka]

That only applies to depreciation of building etc. Losses you make through paying more interest than rental income, body corporate, council rates and the like are not clawed back when you sell. This claw back was brought in a few years ago, maybe the books you have read were written before then.

 

[investor888]

It would seem common knowledge to me. I assume you are talking about a depreciation schedule here, and claiming a tax deduction.
If you depreciate an asset, it means that the cost is reduced, so you capital gain then increases when you sell.
The benefit of depreciating is that you get the money in today's dollars. Eg $4K back in 2008 dollars. It increases your capital gain when you sell in say 10yrs, but that extra $4K in capital gain will not be worth as much in 2018 dollars.
Additionally, you can use the extra $4K today to reduce your mortgage (and therefore your interest payment) which will have a compounding effect.

 

[Perp]

The benefit of depreciating is that you get the money in today's dollars. Eg $4K back in 2008 dollars. It increases your capital gain when you sell in say 10yrs, but that extra $4K in capital gain will not be worth as much in 2018 dollars.
Additionally, you can use the extra $4K today to reduce your mortgage (and therefore your interest payment) which will have a compounding effect.

Plus - if you own the property in a Trust or your own name - you'll benefit from the 50% CGT discount. So you can deduct $4K in depreciation this year, and pay CGT on only $2K when you ultimately sell.

 

[Peter_Tersteeg]

It doesn't really apply if you never sell and the actual valuer of the dollar the government claws back is reduced over time due to inflation. You're better off to take the deduction as soon as you can rather than delay it to save money when you sell.

My problem with negative gearing is that many people treat it as a holy grail without understanding it. Unless you're on a high income the real benefit to your hip pocket is not as much as most people think. It can make a difference but I believe you're better of to ignore it until you collect your tax return and treat it as a bonus.

 

[asdf]

Unless you're on a high income the real benefit to your hip pocket is not as much as most people think. It can make a difference but I believe you're better of to ignore it until you collect your tax return and treat it as a bonus.

I hear ya. A true property investor would never vote for tax cuts!

 

[Hoffy]

I'm a true property investor, among other things, and I'd vote for tax cuts.

 

[Perp]

I hear ya. A true property investor would never vote for tax cuts!

I do hope you were being sarcastic.

 

[Pushka]

I can kind of understand the tax cuts. The lower the overall income tax rate, the less effective negative gearing becomes.

 

[DavidMc]

From what I understand during a CGT calculation it'll be worked out as if you claimed the depreciation anyway, so might as well claim it!

RE: the tax cuts, all wealth is relative, so the more tax the richer those who have tax efficient investments become in comparision.

 

[asdf]

I do hope you were being sarcastic.

Far from it. Look at the Scandies. Tax you to the hilt but the quality of life is one of the best in the world. If it wasn't for the weather, I'd move there. Plus theres great eye candy... Imagine being a property investor with negatively geared IPs in that high tax environment - you are indifferent anyway as you run losses but you get to create your own wealth and the social/infrastructure benefits is just cherry on top.

 

[turk]

So, after years in the game, all the big talk about negative gearing seems like quite a nice deduction, ofcourse no reason to invest to make a loss but still a nice cashflow tool for investors,

I never knew that when you make a loss and claim the deduction you are only delaying the process of having to pay it back if you ever sell (which is why I like the idea of never selling)

Why is this not common knowledge? why did it take me 2 years to discover? Ive read loads of books on the subject but only one of the books (0-130 properties) made the fact known to me.

Can anyone explain how this works in detail?

W2W

How did you think negative gearing actually worked?

Cheers

Pete

 

[want2bewealthy]

W2W

How did you think negative gearing actually worked?

Cheers

Pete

Like everyone says it does, you get a 'tax deduction' I dont have to pay back the money I claimed for my work clothes when I sell them or theyre depreciated. . nor my work tools so I naturally thought I didnt have to pay back the depreciated building if I sell either, nobody ever told me is all, people said and I also read, never ever sell but they didnt say why.

Basically I thought you never had to pay it back and Im right to an extent, only the building depreciation,

 

[Rob Williams]

Some organisations, fronted by charismatic spruikers like to push the "buy new and claim building depreciation" barrow. Better still, they like you to buy the "new" stock they happen to have available to sell.
They have a vested interest in not making it widely known that the building depreciation hets added back to the cost base when you sell. That little piece of information erodes their otherwise compelling argument for buying properties they offer for sale.
Do I sound a bit cynical? You bet. For good reason, too.
I have no issue with buying new and claiming buidling depreciation, but I do have an issue with people being encouraged to do so without full disclosure of ALL relevant facts. A good investment should be a good investment on its own merit. Depreciation and tax advantages should be icing on the cake, not the main reason for buying the cake in the first place.

 

[want2bewealthy]

Congrats on your API appearance too by the way Rob, I see you like that pitcure, alot

Twas awesome,

 

[Hoffy]

RE: the tax cuts, all wealth is relative, so the more tax the richer those who have tax efficient investments become in comparision.

I find that a really bizarre statement on two levels. But it boils down to your opinion that wealth is a relative measure. I may be different, but my wealth is to do with my objectives and measures, and has squat to do with what other people have.

 

[Rob Williams]

Congrats on your API appearance too by the way Rob, I see you like that pitcure, alot

When you're as ugly as I am, you're greatful for any pic that doesn't scare animals and small children
I had a photo shoot for YIP recently. I'll change the pic at some stage for a fresh, new look, if you like.

 

[want2bewealthy]

Lol youre a classic Rob

Sounds like youre doing very well, congratulations on everything youve managed to do, I aspire to have a portfolio like yours and Im well on my way so far so it doesnt seem like so much of a dream anymore, youre a great inspiration to me and many others alike.

When you're as ugly as I am, you're greatful for any pic that doesn't scare animals and small children
I had a photo shoot for YIP recently. I'll change the pic at some stage for a fresh, new look, if you like.

 

[stumunro]

It's been covered before but (according to BANTACS www.bantacs.com.au) the ATO are within legislation to reduce the cost base of your property by the amount of depreciation, regardless of whether you claim it or not.

So you might as well do it!!!

 

[want2bewealthy]

Ahhh the good folks of the ATO, Glad to be helping them out on where I can. .