What is negative gearing and why should i care

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UNLESS you’ve been living under a rock these past few weeks, you would have heard a lot of talk about negative gearing and proposed government changes to it.

But what does it actually mean? Allow us to explain.

Gearing is just a fancy financial term associated with investment properties and repayments on mortgages.

Positive gearing is when the rental income on an investment property is greater than the loan repayments, so you are making a profit straight up.

Neutral gearing is when the rental income meets the loan repayments.

And negative gearing is when your loan repayments are higher than your rental income, meaning youre losing money.

So, why is it used in a positive sense when youre actually making a loss?

Lets say you borrow money from the bank to buy an investment property and your loan repayments are $1,000 per week. You get $900 per week in rent, but that still leaves you $100 out of pocket.

Over the year, this adds up to $5,200 youll need to cough up to cover the costs of your mortgage. This is where the government comes in to the picture.

Under the current laws, you can offset that loss against your tax, so youre getting your money back at the cost of taxpayers. On top of this, assuming the value of your property rises - lets say, by $40,000 - youve still made money, regardless of the helping hand.

So why is everyone up in arms about this at the moment and why should you care? Opposition Leader Bill Shorten wants to limit negative gearing to new dwellings only, starting in 2017.

The suggestion has been met with a mixed response, with many property experts slamming the idea, claiming the changes will push property owners to raise rents and drive house prices up even further.

On the other side of the coin, when negative gearing was removed in the mid 1980s, rents didnt go up in spectaculary fashion.

The property lobby also claims mum and dad investors will be hurt the most. Other experts are saying that is just not true.

Whether you buy into those claims or not, the statistics provided by the RBA suggest negative gearing is used overwhelmingly by wealtheir, older people. AKA the baby boomers, otherwise known as the generation that likes to badmouth Gen Y for being slackers, even though they had it easy. But now Im just ranting.

Like any big topic in the political spotlight, it can be confusing, and can leave you asking whether its even worth giving a damn about.

At the end of the day, whether it affects you directly or not, you should arm yourself with enough knowledge. Then, when it comes time to decide which middle-aged white man should run the country, you can choose the one whos actually in the countrys best interests.

From GQ Magazine

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