For many property investors, negative gearing is part and parcel of being in the investing game. But the practice is risky and, if the labour government makes proposed changes, the benefits may soon be few and far between.
What is negative gearing?
Put simply, negative gearing is when property investors ensure their rental property makes a loss. This means that by the time the property’s expenses are paid such as mortgage, rates, insurance, maintenance and management, there is no money left and the investor must dip into their own pocket.
What are the advantages of negative gearing?
Making a loss on a property has significant advantages when it comes to paying tax. Investors can offset their losses against the tax they pay on other income. Even though the property has made a loss, the property investor has saved enough through offsetting tax that it makes this practice worthwhile.
What are the risks of negative gearing?
The greatest risk that investors face is getting in too deep with negative gearing and finding their cashflow is unable to support the property. Property investors need to be confident that they can provide the cash from their own pocket to address bills (either expected or unexpected) and other expenses when they arise.
What are the proposed government changes that will affect negative gearing?
Put before Parliament on December 5th, the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill, includes a clause stating that investors can only offset tax against income from properties they own.
This means that losses they make on a property cannot be offset against tax they pay on their wages, business income, dividends or other income.
The proposed changes aim to reduce the competition between property investors and people who want to buy the home to live in it themselves.
Often owner-occupiers such as these are pushed out of the running by property investors. By drastically reducing the tax benefits investors receive, the government hopes to level the playing field.
According to interest.co.nz, the proposed tax changes will cost New Zealand property investors around $190 million a year in tax.
Leicester Gouwland, director of financial services firm Crowe Horwath and property commentator thinks that the changes could also have a negative effect on renters.
He speculates that property investors could stop buying as a result of the changes and rents would increase with higher demand for properties.
But Niran Iswar, financial advisor and director of NexGen Accounting doesn’t think these changes should spell the end for property investors. He says “If you rely on tax losses to afford your investment property then something’s wrong.”
It’s a sentiment shared by the team at The Property Crowd. Our properties are all positively geared. Multiple investors group together to co-own a property, and as a result they can purchase it outright This means that there is no reliance on bank funding or debt.
The properties make money which means our investors will receive dividends every month. Compare that to the negatively geared investors who are having to dig deep into their own pockets and do monthly cash top ups. While there may not be tax breaks, The Property Crowd investments see an immediate return and the risk is drastically reduced.