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  • What is negative gearing?

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    From buyers and sellers to owners and renters, there are many different types of people in the Australian property market who have a stake in negative gearing.

    According to a poll by the Essential Report, almost half of the respondents supported including limitations on negative gearing in the new Federal Budget. A more striking figure from that survey, however, is the percentage of Australians who chose 'I don't know' as a response. At 27 per cent, people who don't know outnumbered those who oppose limiting the practice – only 24 per cent.

    Hesitation on that question may come from not knowing enough about what negative gearing is, how the budget affects it and what it means for Australians.

    What is negative gearing?

    While negative gearing may sound like a confusing concept, it's actually quite easy to grasp. According to the Australian Tax Office (ATO), negative gearing happens when a person borrows money – such as with an investment loan – to buy a property that he or she will rent out, and then collects less in income through rent than the interest on the loan.

    Property owners can claim a tax deduction for rental losses under negative gearing.

    Let's say, for example, that someone buys a property, and her costs are $40,000 each year – including the amount she pays in interest on an investment home loan. She rents the property out for $35,000. That results in a $5,000 loss annually.

    While negative gearing may seem like a bad situation, it can be beneficial. The ATO allows property owners to claim a deduction for the total loss from rental income and expenses.

    These owners can also turn a profit from negative gearing if they sell the property after the value rises. This can be risky, as it depends on rising property values and the owner having enough funds to cover losses until selling.

    How does the budget factor in?

    If anything were to be done to change negative gearing, it would have to be included in the Federal Budget.

    According to the Grattan Institute, negative gearing – in conjunction with capital gains tax rates – costs the Australian public $11.7 billion each year. The institute recommended limiting negative gearing and decreasing the capital gains tax discount to 25 per cent from 50 per cent. Taken together, these measures would raise $5.7 billion through savings and increased revenue.

    For now, there is no indication that the budget will include any measures on negative gearing. The polls suggest, however, that greater public awareness is needed for those who are undecided.

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