"But cannot understand how any income loss can be used to reduce a capital expenditure of a property."
Lets say you buy a property for 200k, the first 2 years your negatively geared property loses 20k, which is not claimable against wages income.
When you sell that property at that point, you add your losses to your original capital base for cgt purposes, ie 220k.
So, if you sell it for 240k, your capital gain is 20k, not 40k[for simplicity's sake I haven't included buying and selling costs].
"Then you continue re using up your accumulated losses too quickly and say this may be a downside. Given losses over time become less valuable without doing anything at all due to the effect of inflation"
With this I am not really talking about property or negative gearing, but the value of carried forward capital losses with the change from a 50% discount to a 25% discount, for any share or property bought after the cut off date.
The policy, as I read it, grandfathers any asset bought before the cut off date.
So, a share I bought 2 years ago, which I sell 10 years from now, still attracts the 50% discount for cgt purposes.
Shares I buy next year will only attract a 25% discount.
The rule of thumb now, is that you exhaust your capital losses on capital gains which don't attract the discount, such as shares which have been bought and sold within 1 year, then apply them to shares with the discount.
So the same goes for 50% vs 25% shares.
Now inflation does come into it, but that effect is small, and in any case may be offset by the increased capital gains that may occur because of inflation.
Going back to what you were saying you were doing, you are generating capital gains , not because you need to, but to use up capital losses.
If those capital gains had a 50% discount anyway, your capital losses are not saving you as much money as if you were using them to offset gains on the sale of future purchases, which only get a 25% discount.
I have a 100k of shares with an imbedded 30k of capital gains, and a 50c marginal tax rate., and 30k of accumulated losses from before.
Next year, I buy another lot of shares for 70k, then 2 years after that, I sell them for 100k, ie 30k capital gain.
What is my position in 2 years with scenario 1: sold 1st lot of shares and exhausted capital losses, and later sold 2nd lot of shares with a 25% discount. I have a capital gain of 30 k, which after the discount adds 22.5 k to my income. total tax 11.25k
Now, scenario 2: sell both early and late parcels at the same time.
1st parcel, 30k gain, 50% discount applies, 15k added to income, tax payable 7.5k
2nd parcel, 30k gain, offset by your 30k accumulated losses, zero added to your income, extra tax payable 0.
There, clear as mud, but hopefully not too opaque.
cheers
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