The evidence is staring you in the face. Every year the average PI is making a rental loss on their property, shown by the chart detailing net rental losses claimed by PIs. So by definition, when the average PI sells, they are making a rental loss on their property.
Incorrect. It shows that new property investors are entering the pool every year and making larger losses in the early years before they become profitable.
The established investors who later sell (after they are have been making a rental profit) no longer appear in the stats, because they have already sold obviously.
The stats will always be skewed towards the new loss making entrants as the established profitable investors sell and drop off from the stats.
The stats tell us nothing about the profitability of investors when they sell, because investors who have sold don't appear in the stats.
Quote:
In fact, the whole deferral argument by you is incorrect. The losses are currently not deferred
They are currently not deferred because current laws allow the losses to be claimed immediately. They would be deferred in the future if new laws were introduced to force the losses to be quarantined. Investors would simply claimed the losses later when the property became cash flow positive. It's also possible the new quarantining laws would allow the losses to be offset against future capital gain on the sale of the property, as well as future rental income.
No the losses are claimed against other income immediately, they are not deferred. Whether or not in the future a profit is made, there is no deferral, those losses have already been claimed.
Umm .. we were discussing what would happen if NG was removed .... And if NG was removed, you can't claim it against other income immediately ....
No disagreement that any losses are claimed against other income immediately under current tax legislation ... I used to claim it every year until the interest rates dropped.
Incorrect. It shows that new property investors are entering the pool every year and making larger losses in the early years before they become profitable.
The established investors who later sell (after they are have been making a rental profit) no longer appear in the stats, because they have already sold obviously.
The stats will always be skewed towards the new loss making entrants as the established profitable investors sell and drop off from the stats.
They are currently not deferred because current laws allow the losses to be claimed immediately. They would be deferred in the future if new laws were introduced to force the losses to be quarantined. Investors would simply claimed the losses later when the property became cash flow positive. It's also possible the new quarantining laws would allow the losses to be offset against future capital gain on the sale of the property, as well as future rental income.
Shadow, true or false.
Every year, out of the existing properties being rented, most are making a loss? Hint - the answer is true.
Therefore, out of the pool of rental properties that are sold, most of those are making a loss? Hint - true.
Also therefore, the number of properties ever making a profit is vastly outweighed by the number that are making a loss? Hint - true.
Scenario: PI loses $8,000 per year on average for 5 years. They have claimed $40,000 in rental losses. They are on a tax rate of 40% so have offset their losses by $16,000 i.e. the taxpayer has funded $16k of their losses. They then sell for a $50,000 capital gain. This gain gets the 50% discount, bringing it to $25,000. 40% tax on the $25,000 means they pay $10,000 in tax. So overall they have eked out a $10,000 gain but have cost the taxpayer $6,000.
Understand?
The taxpayer hasn't funded anything. The investor just paid less tax. By the same warped logic, any person who has a legitimate claim on tax deduction has "cost the taxpayer" money. So a sole trader who run a company vehicle at a cost of $10k per year has "cost the taxpayer" $10k?
I completely understand what you are saying but I still think your logic is wrong.
But yes, if someone lost $40k per year for 5 years only to realise $50k capital gains at the end, then they have made a bad investment and won't be in that game for long. In fact, if that is typically what happens to a property investment, then property investment will fall out of fashion pretty quickly and will "cost the taxpayer" much less in the future.
Umm .. we were discussing if NG was removed .... And if NG was removed, you can't claim it against other income immediately ....
No disagreement that any losses are claimed against other income immediately under current tax legislation ... I used to claim it every year until the interest rates dropped.
So if NG were removed though, your position is that there would be no impact to the government coffers other than deferring the tax?
However, most properties never achieve a rental profit. For those, like in the example I gave there is only ever the capital gain (assuming there is one) to offset against the rental losses claimed. And that capital gain is discounted by 50%.
Every year, out of the existing properties being rented, most are making a loss? Hint - the answer is true.
Therefore, out of the pool of rental properties that are sold, most of those are making a loss? Hint - true.
Also therefore, the number of properties ever making a profit is vastly outweighed by the number that are making a loss? Hint - true.
False. You are getting mixed up between the aggregate data vs the individual investor.
Imagine there are eight investment properties in the pool, each making a profit/loss as shown...
A -4 B -3 C -2 D -1 E 0 F +1 G +2 H +3
The total aggregate loss is 4.
Investors enter at position A and work their way up to H as their property becomes more profitable.
Every year, a new investor joins the pool in position A, and an investor in position H sells and leaves the pool.
Even though the total aggregate loss will always be 4, every single one of those investors sells while their property is making a profit.
In Australia, the number of individuals in positions A through D is much larger than the number of individuals in positions F through H, but that doesn't prevent any of those individuals in positions A to D from moving up the ranks and becoming profitable. Its just that there are far more investors joining at the bottom which maintains the aggregate loss.
In summary, the fact that there is an aggregate loss, and more individuals making a loss, does not mean that the individuals who sell are selling at a loss.
The taxpayer hasn't funded anything. The investor just paid less tax. By the same warped logic, any person who has a legitimate claim on tax deduction has "cost the taxpayer" money. So a sole trader who run a company vehicle at a cost of $10k per year has "cost the taxpayer" $10k?
I completely understand what you are saying but I still think your logic is wrong. But yes, if someone lost $40k per year for 5 years only to realise $50k capital gains at the end, then they have made a bad investment and won't be in that game for long.
The investor paying less tax reduces the tax revenue to the government.
Your scenario of a sole trader claiming a $10k deduction would only be relevant if they were trying to claim a loss against their other income, like NG PIs do.
How is my logic wrong? The calcs are correct are they not? In that scenario the PI made an overall $10k profit, but actually came out $16k in front, with the other $6k being funded through favourable tax laws for PIs. It would be the same idea for any PI that has run at a rental loss and then sells for a capital gain? This would be most PIs as shown most PIs are running at a rental loss, but probably most sell for a capital gain.
What would be really interesting though is if they did change and disallow NG, if they didn't allow the carried forward loss to be included in the tax base for CGT calculation. Then there would be a huge impact, but I'll admit that would be unfair. The CGT discount is probably a bit generous though, maybe make it 25%.
So if NG were removed though, your position is that there would be no impact to the government coffers other than deferring the tax?
However, most properties never achieve a rental profit. For those, like in the example I gave there is only ever the capital gain (assuming there is one) to offset against the rental losses claimed. And that capital gain is discounted by 50%.
Your example is very specific and yes in your example, the government is worse off. But i do not think it is a typical example so its not worth extrapolating too far. For most property investors (keeping in mind most property investors earn less than $80k) have a tax bracket of 37% or less. But when they sell, they are likely to be pushed to a higher income tax bracket.
Most of my properties are in discretionary family trusts. By doing that, I have effectively removed those properties from being eligible to be negatively geared. I don't think I have disadvantaged my financial situation by doing so. Also as I have mentioned in previous threads, I'm currently positively geared. I am more than happy for the government to remove negative gearing. In fact, I prefer it to be removed. It will mean less competition from the mums and dads investors who can't see past negative gearing whilst I keep adding a new property every time my overall portfolio becomes positive - to keep it neutrally geared.
False. You are getting mixed up between the aggregate data vs the individual investor.
Imagine there are eight investment properties in the pool, each making a profit/loss as shown...
A -4 B -3 C -2 D -1 E 0 F +1 G +2 H +3
The total aggregate loss is 4.
Investors enter at position A and work their way up to H as their property becomes more profitable.
Every year, a new investor joins the pool in position A, and an investor in position H sells and leaves the pool.
Even though the total aggregate loss will always be 4, every single one of those investors sells while their property is making a profit.
In Australia, the number of individuals in positions A through C is much larger than the number of individuals in positions F through H, but that doesn't prevent any of those individuals in positions A to C from moving up the ranks and becoming profitable. Its just that there are far more investors joining at the bottom which maintains the aggregate loss.
That's all very well and good, but doesn't challenge my assertion.
The only way the average sale has reached profitability is if more of the F, G and Hs are selling than the A,B,C,D. Lets look at the average duration of holding for a property investor, I think it will put this debate to bed. And even then, they would need to be F, G and H long enough to absorb all their prior year losses for your theory to be valid. To achieve that they would have to be at least a H. And that simply can't be the case, as if the average PI held for that long to be a H, then there would be an aggregate rental profit amongst PIs.
That's all very well and good, but doesn't challenge my assertion.
The only way the average sale has reached profitability is if more of the F, G and Hs are selling than the A,B,C,D. Lets look at the average duration of holding for a property investor, I think it will put this debate to bed. And even then, they would need to be F, G and H long enough to absorb all their prior year losses for your theory to be valid. To achieve that they would have to be at least a H. And that simply can't be the case, as if the average PI held for that long to be a H, then there would be an aggregate rental profit amongst PIs.
No, as I have tried to explain, there is no aggregate profit because the number of individuals in positions A through D is larger than the number of individuals in positions F through H. This doesn't prevent any of the individuals in positions A to D from moving up the ranks to becoming profitable. Its just that there are always far more investors joining at the bottom, which maintains the aggregate loss. If new quarantining laws were introduced then investors will just wait until they reach positions F to H, and stay there until they have offset their losses accumulated during their time in positions A to D.
Your claim that most investors must be selling before making a rental profit is proven wrong by my example that shows every single investor could sell while making a rental profit, yet the aggregate data could still show a rental loss simply because the number of individuals making a rental loss at any one time is higher.
Imagine a new law was passed preventing any more investors from joining the pool. Eventually the entire pool would be cash flow positive. The pool only remains negative in aggregate due to the hordes of new investors joining.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy