What will Labor’s proposed changes to negative gearing mean for the property market?
Ever since Labor announced their proposed changes to negative gearing in early 2016, the Opposition has created doubt and worry amongst Australian property owners. With election day fast approaching, it could very well mean a change of government which would see Labor’s plans for negative gearing take effect.
… and what are these plans exactly?
To begin with, it’s first important to familiarise yourself with what exactly negative gearing is and how it’s being used by millions of Australians.
What is negative gearing?
Negative gearing is a financial strategy used by many everyday Australian investors that allows certain tax concessions on properties where there is a shortfall between rental income and outgoings (such as mortgage repayments, maintenance, agent’s fees etc.). In other words, negative gearing is where you borrow money to invest and the income from the investment is less than the expenses – this then results in a net rental loss.
As you develop a net rental loss, you can benefit from this loss by offsetting it against the income you earn from other sources. This translates to having a lower overall income which means having to pay less tax come end of financial year.
What will happen if negative gearing is removed?
If Labor is voted in to lead the country, this could very well mean the removal of negative gearing as well as a cut to the capital gains tax discounts. These changes in policies will have a significant impact on many investors and will likely lead to a negative flow-on effect throughout the property market. Types of adverse flow-on effects we’re expecting to see include:
- Many property owners being forced to sell as they will no longer be able to afford the holding costs
- A continual drop in property prices over a longer period of time
- Fewer investors in the market which will mean that tenants will have to bear the brunt of a reduced supply of available homes in the market and rental prices will increase.
What will this mean for everyday Australians?
Regardless of whether or not you are an investment property owner, the effects of removing negative gearing will be felt by most. In 1985, when Bob Hawke decided to remove negative gearing, the harsh effects of this decision were quickly noticed, and it was again reinstated in 1987. Former Prime Minister, John Howard had this to say about the current situation,
“The debate needs to focus on that piece of field evidence because the experiment with negative gearing (1985-1987) was widely regarded as a failure. That’s more important than glossy economists reports” – The Real Estate Conversation (https://www.therealestateconversation.com.au/news/2016/05/20/look-1985-negative-gearing-impact-says-john-howard/1463741788)
The positive side to this situation is that if you were to buy the right property during a time of economic uncertainty, it would generally mean little to no competition with a long-term hold strategy.
Don’t get spooked!
Even though there’s a chance that we’re going to be experiencing some major policy changes, it may not be in your best interests to go for a hasty sale. Always keep in mind that investing in property is about the long game and that a carefully selected investment property will perform well over time and shouldn’t be a burden while you hold it.
Something important to note …
If the plans for the removal of negative gearing goes through and the reduction of the capital gains tax discount from 50% to 25% takes effect, all properties purchased before 1st January 2020 will be ‘grandfathered’. This means that the new reforms will not apply to existing investment properties – Domain (https://www.domain.com.au/research/labors-negative-gearing-and-cgt-reforms-what-will-it-mean-for-the-property-market-811622/)
It’s best not to wait around
With the current pricing drops we are seeing, and the high probability of these new reforms being implemented, this could be the optimal time to expand upon (or begin) your investment property portfolio. By acting sooner rather than later, you will still have access to the tax breaks and concessions that are currently available.
If this is an option for you, at Prime Estate, we can help you source high-quality properties and work within tight time constraints. By having knowledge of and access to A-grade, high performing investment properties, we can minimise acquisition timeframes.
Category: Property Investment
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