Are there tax advantages when investing in property?

Ben Brett 8 June 2020

When I meet with clients, I like to understand some of the views they have on investment. It is very rare that a client looks to me and simply asks “what should I invest in?” Usually the first step is understanding their existing investment plans and how they have come up with these.

One thing I hear quite a lot is that people want to invest in property for the tax advantages. There seems to be a common misconception that investing in property provides you with a tax advantage that you don’t get with other investments. But this isn’t the case. So let’s unpack this to discuss what tax is payable on different investments and what you should be doing.

What is negative gearing

When it comes to talking about property, you can expect to hear two things mentioned pretty early in the conversation:

  • Avocado on toast; and
  • Negative gearing.

To get things out of the way, the reason young people can’t afford property has nothing to do with avocado on toast, but that is a whole different blog post.

Negative gearing sounds complex and exciting but it’s really quite simple. An investment is negatively geared if the income you generate from that investment is less than the costs of holding it. In the case of an investment property, this means that you pay more in costs each year to hold the property than you receive in rent.

Essentially, you are making a loss on your investment.

Now a loss on your investment is a BAD THING, don’t let anyone tell you otherwise. But there can be circumstances where this isn’t as bad as it sounds.

The effect of a rapidly rising market

There are two ways you can make money on an investment:

  • The income it generates; and
  • A rise in value of the asset.

If you are negatively gearing a property you are losing money each year on the income portion of this equation. If however the value of that asset is going up GREATER than the loss you are making each year AFTER-TAX, then this may be a good strategy.

It’s no secret that Baby Boomers love talking about negative gearing. This is because for most Baby Boomers, they have spent their whole lives watching property prices rise astronomically.

It didn’t matter if their investment properties made income losses year after year, their property increased so much in value that they ended up making a lot of money.

But what about Gen X, Gen Y and Gen Z

When it comes to investments, past performance is not an indicator of future performance and property is a great example of this.

Whenever I speak with a person who bought property in the 70s, 80s, or 90s, it is nearly guaranteed they have done well on their property. As we head into the 2000s and 2010’s, you start to see a mix of well performing property and poorly performing property. Property bought after 2010 however seems to have a very different outcome.

Don’t get me wrong, I’ve seen people do very well on property. But the days of buying any property and watching it rise astronomically in value are definitely over. Those who have done well have been very strategic in how they have approached investing and found small pockets of opportunity.

If your property is making a loss every year AND it’s not rising in value, then you’ve bought a dud investment and need to take action to cut your losses.

But what about the tax I get back?

So you’ve worked out that you have a dud investment but at least you get money back at tax time. That’s a good thing….right? Well, not really.

The government is not in the business of paying people money just because they bought dud investments.

Instead, what is happening is the government is looking at your income AS A WHOLE. This means they are taking into account your loss in working out how much tax you have to pay.

It can get a bit complex but the easiest way to think about it is for every dollar you lose, you get back your marginal tax rate (which is the highest amount of tax you pay).

For example, if you earn $80,000, your marginal rate is 32.5%. If you lost $10,000 on your investment through the year, you would get back $3,250. The remainder you have to pay yourself. It’s not a great outcome.

Is property the only investment where you get tax back?

It’s important to note that this concept of reducing your tax for failing investments isn’t exclusive to property, it applies across all investments. If the income from your shares doesn’t exceed the cost of holding them, you can claim a tax deduction as well.

It’s just property has a lot more things you have to spend money on. You may have to install a new dishwasher, you have to pay a rental agent, you have to pay to advertise the property. There are a lot of costs which reduce how much income you generate from the property, hence you get a bigger amount of money back from tax.

So should I not invest in property?

This is definitely not the case. We think that investing is an important part of everyone’s financial journey and if property suits your investment goals, it can be a great investment.

The important things to note are:

  • Property doesn’t just go up in value astronomically anymore, you need to be strategic about how you pick investment properties.
  • Property does not provide any special tax advantage over other investments- an investment loss is the same regardless of the investment.
  • If you are deliberately losing money to get a small portion of tax back, you may want to review your strategy.

As always if you have any questions, please don’t hesitate to reach out.

This post is from our resident Financial Planner Ben Brett, check out his details in the About Us section.

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Posted in: Ben BrettInvestments

About the author: Ben Brett

Ben Brett owns and operates Bounce Financial with his wife, Cara. Having started his career as a Corporate Lawyer, Ben has always had a passion for helping make the complex things simple. Follow Ben on Instagram @bouncefinancial or on LinkedIn at www.linkedin.com/in/ben-brett/