Negative gearing seems to have fallen out of fashion
Thursday, November 23rd, 2006For a while there everyone seemed to be getting into negative gearing, including the investors where I worked. The advice to negatively gear came from financial planners, from newspapers, from magazines.
Where I worked we had an informal club of investors—people who actively traded shares or invested in property. We sat down one day and discussed our investments. I was the only one who was not negatively geared.
Everyone thought I was crazy. Think of the tax benefits I was missing out on.
I said then, and would still say it, that I preferred to pay a little extra tax than take extra money out of my own pocket to fund my investments.
Three years on many of those people in our investor’s club have sold their investments. Most of them said they preferred to use the extra money for other things, like holidays, or reducing credit card debt.
I still have my investments, and they’re chugging along quite nicely thank you.
Negative gearing has fallen out of fashion. Even the investment advisers aren’t pushing it as much. Read the magazines now and they talk about positive gearing.
What changed?
The change is partly due to reduced tax rates. Negative gearing is, and always has been, more use to you when you pay a higher tax rate. Even so, the trend was happening before tax rates reduced.
I think it has a lot to do with people realising it was not the panacea it was touted to be.
When you negatively gear, money still comes out of your pocket. You have to contribute to your investment. If you are stretched tightly as it is—mortgage, credit card, kids—then the money you take out to put into your investment could probably be better off spent paying off the credit card, or the kids’ school fees.
Not only that, after you have done a tax return or two you realise you don’t get 100% of that extra back, you only get a percentage of it.
For example, if your tax rate is 40%, is it better to get back 40% of $10,000 negatively geared, or is it better to pay the whole $10,000 off on your credit card?
There is one time that I would consider negatively gearing though. This scenario would include having money burning a hole in my pocket, being on a very high wage, and also have all my bases covered in other investment areas. I would negatively gear if I could see down the track, that I would end up in front over all and had the money to spare.
What do you think?