The topic of negative gearing is poised to be a critical issue in the upcoming Australian Federal election. Essentially, negative gearing is the ability to claim a deduction on your personal income for any loss generated by a rental property that is owned by you meaning your taxable income is lower, and it currently benefits investors looking to eventually sell properties for a capital gain who want to offset their expenses in the short term.
What are the potential changes to this?
The Labor Party intends to reform the tax concession with the ultimate goal of improving housing affordability for Australians. It would not do away with negative gearing entirely but would only let investors deduct rental losses from their personal income for investments on newly constructed housing, with a grandfathered policy applicable for already negatively geared investors utilising the concession.
What impact would putting limitations on negative gearing have on both Australian investors and homeowners?
A significant benefit that the Labor party sees from limiting negative gearing would be for anyone buying already-established properties. Essentially, removing the competition for established home buyers/young first home buyers, as investors would look towards new and off the plan properties.
Another group that could potentially see a benefit to the reform would be property developers and home builders, as demand by investors for new housing would increase — placing their attention firmly on new and planned stock releases.
Alternatively, opponents to the plan say it could remove investors from the market as abolishing the incentive of negative gearing may push Australians to invest in other asset classes, which may in turn place renters in a tight position as rental prices increase due to lower rental property stock.
How will the new policy affect the rental market?
Labors' current proposal could see prices on new developments and off the plan properties skyrocket as competition increases for newly built housing. The grandfathering policy may also cause a rush of buyers to purchase established properties before the implementation of the proposed plans, further pricing out first home buyers.
The plan, however, is unlikely to place an upward strain on rental prices though as some critics have indicated. This comes down to the fact that as an owner-occupier enters the market, the demand for a rental decrease as a renter has now become an owner-occupier. Similarly, if investors are limited to new and off the planned stock, this would subsequently introduce new rental stock to the market.
As to what would really make a difference to housing affordability and household debt levels is very much subjective at this stage and may not coincide to limiting negative gearing and tax concessions. For further information on negative gearing, get in touch with the team at Preston Finance & Insurance.