7 The truth about negative gearing Flashcards
(41 cards)
What is negative gearing?
An investment strategy where an investor incurs a loss on a property with the expectation of future capital appreciation.
Why is negative gearing popular among investors?
It appeals to investors’ desire to make money and save on taxes, with over 90% of properties for sale being negatively geared.
What role do professionals play in promoting negative gearing?
Developers, real estate agents, accountants, lawyers, and financiers financially benefit from promoting negatively geared properties.
What is the primary reason investors believe negative gearing works?
Historical data shows property values have generally increased over time.
What is a key downside of negative gearing?
It creates a certain loss today with the hope of future profit, which is less favorable compared to cashflow investing.
What must property investors declare on their tax returns under Australian law?
All income earned from property investments, including rental receipts and realized capital gains.
When are capital gains taxed?
Capital gains are taxed only when the property is sold or disposed of.
What are common tax deductions for real estate investors?
Interest, rental management costs, insurance, council rates, utilities, minor repairs, and depreciation.
True or False: A property must be profitable to qualify for tax deductions.
False.
In Scenario A, what is the taxable income after accounting for property losses?
$65,000.
What happens to capital gains tax (CGT) if a property is sold?
Capital gains must be included in the investor’s income tax return.
How can a property loss affect a taxpayer’s overall tax position?
It can reduce taxable income and therefore lower the income tax payable.
What is capital appreciation?
A form of investing profit that occurs when a property increases in value.
What are the three phases of a property market?
Growth, stability, and decline.
What triggers the next growth phase in the property market?
Easier access to credit, increased incomes, lower interest rates, and government incentives.
What can cause rapid price increases in the property market?
Price speculation and irrational buyer behavior.
How often do property prices trend upward according to historical data?
Property prices increased for 31% of the time, decreased for 17%, and were stable for 52%.
Fill in the blank: The broad investing strategy of buying and holding real estate will be profitable for ______% to ______% of the time.
60% to 70%.
What is a better approach than a one-size-fits-all strategy in real estate investing?
Tailoring investing to the prevailing market conditions.
True or False: Property prices double every seven years according to statistical evidence.
False.
What does table 7.7 reveal about property price forecasts vs actual prices?
There is a discrepancy between forecasted property values and actual median house prices.
What is the primary concern regarding negative gearing as a wealth-creation strategy?
Negative gearing does not seem like a great long-term wealth-creation strategy when considering holding costs, tax, and inflation.
What was the top marginal tax rate for individual taxpayers in Australia in 1985–86?
60 cents in every dollar above $35,000.
What tax benefit do negatively geared investors experience as tax rates fall?
The amount of their tax saving reduces.
