Changes to negative gearing, how it will affect property.

We have all heard about the changes which Labor are looking to make to our tax system, if they take Government in the May 2019 election. It will affect all investors as well as retirees and home owners.

Please keep in mind that there is no proposed legislation to look at, at this time. To date any information, we have has come from press releases.

Let’s talk property

Right now property is under pressure from a number of fronts:

1.      Credit tightening – banks now have stricter condition regards lending, which has already restricted lending volumes and the number of people who are now able to obtain a loan.

2.      Oversupply of units in the capital cities.

3.      House prices increasing faster than the rate of inflation and household income. This has blown out the debt to income ratio. Meaning more Australians are spending more of their income paying back debt. This is called Mortgage Stress.

4.      Historically low interest rates are about to increase compounding above issues.

5.      Loss of negative gearing.

We are only going to look at the affect that the new labor policy is going to have on negative gearing.

What we know to date is; 

·         negative gearing will be grandfathered for those investors who are already negative gearing (subject to conditions).

·         negative gearing will be allowed if the investment property is a new property.

·         If you do not fall into these categories, then you will have to capitalize the loss. This means that the loss will be added to the cost of the property reducing any future capital gain.

·         Negative gearing losses will not reduce your income tax unless you are grandfathered or exempt.

These changes will affect all investment properties and will have a flow on effect for owner occupied properties. Let’s keep in mind that around 67% of all properties are owner occupied and around half of these do not have a mortgage on the properties. The impact will be less for owner occupied.

For the investor it will be a different story and the affect will depend on your situation of which there are three:

1.      New investors will have to buy a new property to take advantage of the negative gearing this will cause two issues:

a.      A new house will cost more than a similar secondhand house.

b.      When you go to sell the buyer will not be able to take advantage of negative gearing, this will result in a lower selling price.

2.      Existing properties currently negative gearing will have the following issues:

a.      When you go to sell the buyer will not be able to take advantage of negative gearing, this will result in a lower selling price.

b.      You will not be able to change your loan or you would lose negative gearing benefit.

3.      New investor buying a second hand house could be in a better position:

a.      Property will be cheaper the a new one.

b.      With a smaller loan you should be able to pay it off sooner and make the investment positively geared.

The key is to stop looking at property as an investment which gives you a tax deduction, which is the bulk of small property investors. Take the same approach for property as you would with shares, look for solid income and long term capital gains. If you do not have the capital to buy a property directly consider property trusts which requires less up front and allow you to add to them over time.

Once last comment, this legislation will affect all negative gearing, share investors will also lose any negative gearing benefit, however, it will have a smaller impact, as shares provide more income then property and therefore any negative gearing benefit is less than property.