The sun may be setting for negative gearing second-hand properties…

31 March 2019

Eddie Chung, Partner, Business Services |

We now have a date. The ALP announced last week that if they win at the next Federal Election, it would seek to introduce its tax policy to remove negative gearing on properties that are not new and reduce the capital gains tax (CGT) discount to 25% from 1 January 2020.

This announcement has essentially crystallised a window period between now and 1 January 2020 during which investors who wish to negative gear properties that are not new may have the last chance of doing so.

So does this give investors the green light to rush out to snap up second-hand properties in the next 9 months?

As with most financial decisions, my view is that it will really depend on your individual circumstance.

In my mind, the key issues that should perhaps be considered include the following:

  1. The policy change would only come into play if the ALP wins government, so your personal view of whether the ALP would win at the next Federal Election may affect your decision. Even if the ALP wins, there is still a chance of political back-flip (you cannot tell me that does not happen) due to intense lobbying from interested parties who oppose the policy, so losing negative gearing and the 50% CGT discount may not be fait accompli at this stage. Therefore, before you start hunting down suitable properties right now, delaying your action until at least after the Federal Election, while not fool-proof, may be a sensible thing to do.

  2. Recall that negative gearing potentially saves you tax but that is based on the highest marginal tax rate that applies specifically to you.

    For instance, if your taxable income is in excess of $180,000 a year, every dollar of negative gearing loss saves you 47 cents in tax (including the Medicare Levy). However, if your taxable income is around the $80,000 mark, every dollar of negative gearing loss would only save you about 35 cents in tax.

    In the end, if you are making a real cash loss while you are negative gearing your property, you need to be comfortable that the tax savings you achieve and the after-tax capital gain on your property would outweigh the economic losses you accrue on the property during the time you own the property. Otherwise, you may actually be going backwards by investing in this property.

  3. Apart from the usual ‘shopping list’ in relation to the property you wish to buy (eg, location, physical features, rentability, etc), you need to form a view on the future value of the property in the post-negative gearing world.

    While house and apartment prices may come under upward pressure in the next 9 months if investors rush out to snap up the last of the negative gearing opportunities on second-hand properties, these properties may become less attractive from an investment perspective after 1 January 2020. Coupled with the upward price pressure that may inflate property prices before that date, second-hand property prices may stagnate or even go backwards in a post-negative gearing world. Again, if capital growth on such properties is limited going forward, you need to consider if it makes financial sense to invest in these properties now in your specific circumstance.

    For instance, if you intend to sell your property to realise the capital growth on your property for retirement, the lack of capital growth may not make sense in your situation despite the availability of the negative gearing losses in the years leading up to the sale.

    On the other hand, if you intend to progressively pay down the debt on the property, never wish to sell it, and plan to live on the rent to fund your retirement, the property may still be a sensible investment for you over the longer term.

To that end, talking to a licensed financial planner and a tax adviser first before you buy a property out of FOMO may not be a bad idea in this uncertain environment.