Indebted once more

One of the peculiarities of the Australian taxation system is that any interest you earn on accumulated savings is taxed as part of your income. It doesn’t take too long before you find that after tax, your savings are actually diminishing once CPI is considered.

However, if you were to invest in a residential property, any difference between the rental income and the interest on the mortgage you are paying comes off your taxable income. So, at the beginning few years of a mortgage, if you’re at a (un)reasonable tax bracket, you will find that much of your mortgage is funded by your tenant and the Australian tax-payer.

The result? A persistently buoyant Australian residential property market which in the last couple of months (combined with a new low in interest rates) has started to once more lift up, registering a healthy %70 clearance rate – especially in the inner and middle belt suburbs of Melbourne, especially in properties below $1 million dollars, especially for anything that’s not an apartment.

I wouldn’t call myself a property bull, in fact by temperament, I’m much more of a bear but given Melbourne’s population growth, the state government’s inability to invest in transport and services infrastructure beyond the 15km zone of the city centre – almost any sturdy reasonably priced residential home with 3 or more bedrooms and a good backyard within the 9km zone with a low crime area within walking distance of public transport, schools, parks etc, is IMO a reasonably stable investment in the mid to long term.

So, after about 8 months of looking around, I’m once more in debt. It took a little longer than I expected to find the perfect place but it ticks all the boxes. Plus it is huge (850 square meters) for a place that’s 8 km from the city and the backyard is a nature reserve so from the back balcony, it feels like you’re out in the bush.

Too bad we won’t be moving into it for at least a couple of years: the negative gearing advantages are just too good to pass up.


EDIT: I should note that I’m actually not in favour of negative gearing of established residences. I would actually go further than the Henry review and abolish all negative gearing for existing housing stock. Negative gearing of new developments is probably fair enough given the shortfall between supply and demand. But I doubt that any government will have the political courage to get rid of this highly popular version of middle and upper income welfare even if in the end, it’s the banks that profit most and the taxpayer that pays.

2 thoughts on “Indebted once more

  1. Negative gearing was removed by Keating when he was treasurer. It was an unmitigated disaster, which is why he reintroduced it. Negative gearing puts investment into the same category as running a business. When you run a business your costs are offset against your income (this includes depreciation) and you can offset a business loss against any other income in much the same way you can an investment loss (note this is a running loss not a capital loss). Once you are in a cash flow positive situation with a property (or any other investment, including putting money in the bank) you pay tax on the profit.

    1. Yeah, I’d prefer that government doesn’t tax rental income as part of personal income. That way, it balances out on the other side of the equation as well.

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