There are some occasions in property investment where losing money can actually be a good thing.
I refer to negative gearing; a practice used very effectively as long as it is done correctly and with some good advice from your accountant.
A negatively geared property is one that costs its owner more to own and operate on a monthly basis than it returns in income.
It’s the opposite of a cashflow positive property, which earns enough rent to cover the mortgage and holding costs and still make the owner a profit.
Negative gearing allows investors to claim expenses on a property, or other loss making investments and ventures, to reduce their payable tax on other income.
This is why you might hear stories from time to time about a well-known billionaire magnate of one persuasion or another somehow paying less tax than you each year…a lot less tax too.
In fact, in the 2010-11 financial year negative gearing by property investors was responsible for reducing the government’s personal income tax revenue by more than $13 billion.
Such numbers show why it is so attractive to take tax money out of the government’s coffers, while getting a piece of an asset that is likely to grow substantially in value if held for several property cycles and eventually turn positive cashflow once you raise the rent enough to cover your mortgage repayments and other costs.
Of course, the government probably wouldn’t mind getting its hands on some more tax, especially with the well-publicised budget black holes and deficits we keep hearing about.
This has no doubt contributed in some way to recent debate over whether it is time to put an end to negative gearing.
Critics of the practice say it makes housing unaffordable for those looking to own and occupy, is an unfair tax break for the wealthy and would save the federal government $5 billion in the first year if scrapped.
But others say that would mean fewer investors and therefore fewer rentals on the market, which would cause rents to rise and hurt lower income households.
At this point, the government does not look like interfering and, any intervention would no doubt require careful consideration, as it would not be popular with the voters whose portfolios contain loss-making properties.
However, if the first home buyer shortage being encountered in some states begins to spread to the rest of Australia, action might once again be back on the table.
Watch this space.
Tim McIntyre is the senior real estate reporter for the Daily Telegraph and News.com.au. Over the past decade, he has attained widespread knowledge of Australia’s many unique property markets and is an authority on all things buying, selling and investing. His commentary appears every Saturday in the Daily Telegraph Real Estate lift out, as well as online at news.com.au