Negative Gearing and Capital Gains Tax (CGT) explained:
Negative gearing refers to the situation where property investors hold an investment that loses money in the short term because the interest costs are higher than the rental income. Some investors choose this strategy in order to gain tax incentives from their investments and because of the expectation of making capital gains in the future.
Capital Gains Tax applies when a property is sold for a profit, where the tax (for an individual) is paid on the gain at their marginal rate. With the current policy, individuals and trusts are entitled to a 50 per cent discount on the capital gain amount providing they have held the asset for more than one year.
The Proposed Changes:
Labor’s proposal is to limit the availability of negative gearing incentives to new homes only and to halve the Capital Gains Tax discount to 25 per cent.
When will the changes take effect?
If Labor were to win the next election, expected to be held in May, the proposed changes could be introduced as early as next July, however most political observers believe it would more likely come into effect in mid-2020.
What does this mean for new investors?
For new investors, these changes mean that you will be able to still utilise negative gearing incentives but only on newly constructed housing.
Only investors who have a strategy to negatively gear a property will be impacted by the changes to negative gearing.
If you have a strategy to invest in positively geared properties, you will only be impacted by the CGT changes when you sell the property.
What does this mean for existing investors?
The majority of investors go into property investing for capital growth over the long term, and this sometimes means accepting losses in the short term. Investors may start off negatively geared but with the right investment strategy, the property will become profitable
For existing investors, there will be a “Grandfather” rule applied to existing negatively geared investment properties whereby if you hold investments before this date that utilise negative gearing, you will not be affected by this change.
If you’re an existing investor you will continue to be allowed to deduct net rental losses against income.
This also means, if you purchase a property in the next few months prior to any of the proposed changes being finalised, you will fall under the “Grandfather” rule.
Interest rates and Negative Gearing.
With interest rates as low as they are at the moment, most investors will have positively geared property because the rent exceeds the interest. This means that due to the current lending environment, fewer people will be impacted if these proposed changes are approved through parliament. The impact of these proposed changes will be greater when interest rates begin to rise and the rent received on an investment property no longer exceeds the interest paid on the loan for the property.
Impact to the industry.
The Property Investors Council of Australia is mobilising investors through a petition arguing Labor’s policies could trigger a recession.
The Master Builders Australia group warned that the proposed tax changes could cost jobs due to the investors deferring from purchasing new homes until the changes are determined. The Masters Builders Australia group have warned that these changes are the sort of thing that could trigger a recession.
If you are a would-be property investor, it is the best time to buy your real estate investment, as the proposal includes a grandfathering provision, to ensure you will continue to benefit from the rules as they currently stand.
Don’t be scared
One important thing to note, if Labor gets into parliament and all these proposals get approved, your entire investment portfolio is not going to collapse. It will just mean that investors need to take these changes into account and accommodate this when purchasing an investment property.
If you are looking for a Buyer’s Agent to assist you with purchasing a home or investment property in the Sydney, Brisbane and Newcastle regions, please get in touch with Aus Property Professionals here or give us a call on 1800 146 837!