Gearing Changes Create Two -Tiered Market

Posted on 29/04/2019  

Labor’s negative gearing policy has the potential to create a two-tiered property market where it will become almost impossible to sell “nearly-new” properties, according to Tyron Hyde of depreciation experts Washington Brown.

He asks: why would you buy a property that is, for example, one year old when you can buy the brand new property next door and get significantly better tax benefits from depreciation?

Having one rule for new properties and another for 2nd hand property was implemented by the Turnbull Govt in May 2017.

Under the new rules you can only claim depreciation on the plant and equipment in brand new buildings or if the plant and equipment is purchased brand new for a second hand property.

“No more cruising ebay to find pre-loved kitchens and appliances when you renovate – if you want to claim depreciation,” Hyde says.

“Combined with the fact that if you purchase a property built before 1987, you cannot claim the building allowance or depreciation on the structure of the building, we already have a strong bias towards purchasing new properties.”

Hyde believes Labor’s proposed changes to negative gearing will only strengthen this bias.

Labor’s proposed negative gearing & CGT policy has four key components:

  1. Negative gearing will only be allowed on brand new properties moving forward.
  2. Existing negatively geared properties will be grandfathered and thus not affected.
  3. Moving forward you will no longer be able to deduct these losses against your personal income; you will be able to deduct them against other investment income (say share dividends or other positively geared property) or you can carry the losses forward to offset the final capital gain.
  4. Labor will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50% to 25%.

There are significant implications generated by these proposed changes, according to Hyde.

“They will open the door to an increase in property spruikers trying to push over-priced properties off the plan to investors,” he says.

“It will actually favour investors who have other investment income ( eg shares) as they will be able to claim any tax losses from negatively geared properties against their investment income – investors who don’t have any other assets or investment income may only be able to use the losses, if they sell the negatively geared property and it makes a profit.

“Most importantly, many people do not fully understand negative gearing.”

A Washington Brown survey found that 38% of people were not aware of the fact that if negative gearing is abolished on newly acquired, second-hand properties, they will no longer necessarily be able to immediately claim property management fees, strata levies or even Land tax.

Hyde provides a list of “losses” that you will no longer be able to deduct immediately if Labor’s policy becomes law:

  • Body corporate fees
  • Maintenance like lawn mowing
  • Advertising for a tenant
  • Council Rates
  • Water charges
  • Property Management fees
  • Repairs to property
  • Land tax

He says that these losses may be carried forward and utilised in the event you sell your property for a profit or you can offset these losses against investment income from other positively geared property or your vast array of shares that you own!

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