There’s a lot of noise in the current election campaigns around the housing market, with negative gearing and capital gains tax on investment properties being the two hot topics.

Labor is proposing significant changes in these areas. As they are the bookies’ favourite to win the May election, we take a look at what their proposed changes could mean for Australian homeowners.

What is negative gearing?

Negative gearing occurs when the tax-deductible interest and other expenses (e.g. repairs, insurance, depreciation) that the investor is paying are higher than the income (rental return) generated by the investment property. This means the investor is making a loss on the property.

However, negative gearing (owning a property which costs you more than it makes in income), means the investor can offset any tax loss incurred against other taxable income such as salary.

Investors implement negative gearing as a strategy to have property-related costs not covered by rental returns, partially funded by the ATO through tax savings. Naturally, the investor needs to fund the balance from their own cash flow.

Negative gearing was introduced in the early 1980s to incentivise Australians to invest in property and to help encourage the supply of affordable rental properties. Labor argues this arrangement provides a benefit to property investors over first home buyers as it increases the demand for property and adds upward pressure on prices.

What is capital gains tax?

Capital gains tax is the tax amount a property investor pays on their capital gains (the profit made after selling their property). Property investors are currently entitled to a 50% discount on the capital gain amount if they hold the property for over 12 months. Capital gains tax does not apply to the property you occupy as your principal private residence, and is generally charged at the same rate you pay on your income/salary.

What are the policies of the two major parties?

Labor

Labor has proposed policy changes in order to address the market disparity that exists in Labor’s view between property investors and owner-occupiers.

If Labor wins, the proposed policy changes include:

1. Limiting negative gearing to new housing from 1 January 2020. All investments made prior to this date won’t be affected by the changes and will be fully grandfathered.
2. Halving the capital gains tax (CGT) discount for all assets purchased after 1 January 2020, reducing CGT discount from assets held longer than 12 months from 50 per cent to 25 per cent. All investments made prior to this date will be fully grandfathered.

Liberal

The Liberal Party has no proposed changes to the current arrangements.

How could these potential policy changes impact property investors?

If Labor wins the upcoming election, here are some positive and negative impacts for Australian homeowners:

Short term positives

It might be expected that the number of property investors buying property will spike significantly between the election and the 1st January 2020 before the policy changes are implemented next year to take advantage of the grandfathering provisions.

As an investor, if you’re looking at buying more existing property in the near future, it could be a good idea to start looking now. You’ll be able to negatively gear and claim the larger capital gains discount under the old regime prior to the potential policy change start date of 1 January 2020.

If you’re thinking about selling your property this year, you may benefit from the changes in the latter half of 2019 as demand and house prices may increase due to the investor buying spike that is predicted before the changes come into effect.

Long term negatives

Once the changes are implemented, both investors and sellers will likely be negatively impacted.

For investors, they will only be able to benefit from negative gearing on new housing, which may dampen demand and provide a headwind for existing house prices.

The negative gearing policy as it stands supports lower rental rates as tenants currently benefit from a wider selection of rental properties.

Therefore, rent rates are expected to increase up to 15 per cent by 2022, according to SQM Research, helping investors compensate for the tax deductions which have been removed and also the potential for reduced supply of rental properties.

For sellers, SQM Research suggests house prices in Australia’s capital cities are likely to drop between 5 and 12 per cent on a weighted average between 2020 and 2022 as property become a less attractive investment with these tax changes. Naturally, this is good news for property buyers.

If Labor wins power, and you’re thinking about selling, it could be a smart idea to talk to a real estate agent as soon as possible. As mentioned, the number of investors buying property is likely to spike between the election and 1 January 2020 if Labor wins. So, it could be smart to list your property before many buyers potentially exit the market.

For argument’s sake, imagine your Sydney investment property, which you have owned for over 12 months, is valued at the current median price of $1.03 million and after the election, you decide to sell at a price of $1.15 million for a $120,000 gain. You will pay up to $28,000 more in capital gains tax on properties acquired after the change than those purchased before the change.

Since property prices have dropped in most capital cities, it could be a good idea to contact tax accountants and stay informed about how these upcoming changes may impact your investment properties.

Long term positives

Labor believes the proposed changes will assist first home buyers with lower house prices and support the construction of 250,000 new affordable homes over 10 years.