Current negative gearing policies have enabled many property investors to get into the market years before they would otherwise be able to. The Australian Labor Party proposed changes to negative gearing policies as a solution to the exponential boom in property prices in major cities that had crushed the Australian dream of ‘owning your own home’ for young Australians. However, with a rapidly softening property market, increasing interest rates, and the Australian Labor Party refusing to back down on their stance on the policy, what will be the consequences for current investment property owners?
First, let’s review what negative gearing actually is and what the current policies do for investors. Negative gearing is the situation where the cost of owning a property is greater than the income from owning it. For example, interest repayments on the bank loan for your investment property are $38,000 per year, and yet you only make $35,000 per year from leasing it. You are negatively geared by $3,000. What current policies do is allow investors to offset this loss by claiming this amount against their personal income come tax time. Investors will end up making their money on the capital gains of the property over time.
Under a Labor government, Bill Shorten has proposed to eliminate the negative gearing tax offset and reduce the capital gains tax concession. This would place investment properties out of reach for most, except the wealthy (who can positively gear) and force those already in the market out. Rising interest rates are already increasing the degree investors are negatively geared by, and with Shorten’s proposed reform, this expense would no longer be offset.
“But I’ll make my money from capital gains like you said earlier, right?” Wrong! Not only is the property market becoming volatile and falling, if you are lucky enough to make a capital gain and breach the threshold then you’re in for a nasty tax bill with capital gains tax concessions being slashed! And even then, remember that you have to make enough money to offset the negative gearing you’ve experienced throughout owning the property.