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Negative gearing falls on lower interest rates

Negative gearing falls on lower interest rates

The proportion of landlords negatively gearing rental properties has fallen below 60 per cent for the first time on record, reflecting a decline in interest rates.

Of the 2.2 million taxpayers owning at least one rental property, 1.3 million declared a net rental loss in 2018-19, according to new annual data published by the Australian Taxation Office.

Overall, net rental income was negative $3 billion.

Total gross rental income of $47.8 billion received by landlords was less than deductions for their cost of interest, capital works and other rental deductions incurred.

Despite the decline in negative gearing there are still many landlords owning multiple properties who are claiming a tax deduction for earning less rental income than the cost of running investment properties.

The number of landlords negative gearing at least six properties was 11,226 in 2018-19.

Some 10,935 landlords negative geared five properties, 26,719 owners had four properties claiming a net rental loss, 74,955 property investors had three properties negative geared and 250,035 had two properties claiming a loss.

Almost 1 million people – 931,132 – had one property negatively geared.

Landlords who claim a net rental loss are in effect betting on making money from a property investment via house price increases.

There were 19,113 fewer negatively-geared landlords than in 2017-18, the first fall in five years, analysis by The Australian Financial Review shows.

As a share of landlords, 58.6 per cent claimed a net rental loss – the first time since records dating back to 2003-04 show a sub-60 per cent result.

The decline in negative gearing coincided with the Reserve Bank of Australia cutting the overnight cash rate to 1.25 per cent by June 2019 – back then a record low.

The share of landlords claiming net rental losses peaked at 69.6 per cent in 2007-08, when the RBA raised the cash rate to 7.25 per cent during the mining investment boom and when market mortgage rates were about 10 per cent.

The share of landlords negative gearing property is likely to continue falling in the low interest rate era, because low mortgage rates make it harder to claim a net rental loss and make it more likely rental income will exceed the expenses of owning an investment property.

The decline in negative gearing also follows Prime Minister Scott Morrison’s crackdown as treasurer in 2017, when he stopped landlords claiming travel expenses for inspecting their properties and imposed limits on plant and equipment depreciation deductions.

The decline in negative gearing also coincided with Labor’s vow in the run up to the May 2019 election to ban negative gearing for future property buyers, except for newly built homes.

Axing negative gearing is no longer Labor policy, though it will officially unveil its new tax policy before the next election.

Landlords reported gross rental income of $47.8 billion in 2018-19.

More than offsetting this were deductions of $24 billion for rental interest, $4.1 billion for rental interest and $22.8 billion for other rental deductions.

Source: John Kehoe

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