How Will Negative Gearing Reforms Affect Your Property?

February 15th, 2019 - by Brad Gillespie

Negative gearing is a hot topic for the upcoming federal election, with Bill Shorten’s Labor opposition proposing reform and the government holding firm on the current rules.

So, if there is a change of government at the next election, how will the proposed reforms affect investors? Let’s dive in.

What is negative gearing?

Negative gearing occurs when the expenses you pay on an investment are higher than the money you make from it, meaning you’re operating at a loss. For example, if your mortgage repayments, maintenance costs and property management fees cost more than you’re making in rent, your property is negatively geared. This happens a lot in property, especially in inner-city Sydney where prices almost always mean buyers need a sizeable mortgage. But it can also apply to other investments like stocks and shares.

While making a loss may sound like a negative, there can be a significant benefit in doing this. Australian law currently lets investors deduct these losses from their taxable income. This makes it easier for people to buy investment properties, especially if they’re not reliant on the cash flow provided by ongoing rent repayments. They can then wait for the property to grow in value over time, while receiving a decent tax break.

So why does the ALP want to change negative gearing and how will they do it?

Negative gearing and the capital gains discount were originally set up to increase the housing supply, especially for new properties. Labor argues, however, that investors usually buy existing stock, with 93% of new investment loans going to these purchases, according to data from the Australian Bureau of Statistics.

Labor also argues that negative gearing often benefits the wealthy, with the top 20% of income earners receiving about half of the benefits. According to Labor, this means many beneficiaries are actually investors with large portfolios, not everyday investors. On top of that, Labor believes that the subsidy and discount are unaffordable, taking $10 billion from the budget this year alone.

So what’s their plan? To address the original benefits of increase housing stock, Labor has proposed limiting negative gearing to new housing only. Investments that are currently negatively geared could stay that way, but any future tax-deductible losses must come from brand-new dwellings only.

And what about the current government?

The Liberal Party doesn’t support this negative gearing reform, arguing that many investors are not actually in the high-income brackets Labor is referring to. The Liberals say that a lot of investors have taxable incomes under $80,000 and also that the majority only claim losses on one negatively geared property.

They also suggest that reform would reduce the number of buyers in the market. This will reduce homeowners’ equity as they’ll eventually be selling their home into a quieter market. They also believe it will cause a relatively minor decrease in median property prices in capital cities in the medium-term, and that the supply of properties could dry up, pushing rents higher.

What does negative gearing reform mean for investors?

If negative gearing is restricted to new properties, there will be fewer opportunities for investors of all kinds to benefit from this long-established tax break. But mum and dad investors could actually be hit hardest. That’s because income will be assessed on an investor’s entire portfolio. So affluent investors will have the chance to mix negatively geared properties with positively geared ones, as long as it’s positive overall.

That said, people with one or two investment properties could still come out ahead. It will just be more important than ever to carefully select a property in an area set to grow. That’s where the services of a skilled real estate agent come into play.

Conversely, the market could also open up for first home buyers, who will be able to purchase a property that otherwise might have been snapped up by investors. At least, that’s what the ALP will be hoping for.

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