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Investors should BUY NOW! Negative gearing reforms are the icing on the cake..

The Australian Labor Party is proposing significant negative gearing reforms, should they come into leadership at the next election. They are suggesting property investors who hold existing stock should not be able to claim the negative gearing as a deductible expense come tax time. The twist is, they are looking at still offering negative gearing on new properties but this is another danger on its own.

The negative gearing reform will essentially result in increased net holding costs for investors who own property and some property commentators are suggesting this will have a negative impact on the market.

Anna Porter of Suburbanite says: “negative gearing is simply icing on the cake for investors, it is not the whole cake. Before even worrying about the tax treatment, which is really all negative gearing is, investors need to really understand why they are investing. This is usually not about tax at a fundamental level but rather about wealth building.”

Anna went on to say, when Suburbanite develop investment strategies for their clients “it is about building equity, buying growth properties, setting their families up for long term financial security and the tax side of things is really just a bonus. We base all of our cash flow analysis off the before tax position for each client so anything they get back is surplus and not factored into the affordability”.

With investment activity on the rise throughout the country, some would be forgiven for thinking this will mostly impact the wealthy end of town with big portfolios and bigger tax problems. The Labor government is looking to save around $1.7 billion per year on this measure, but the reality is it will come at the cost of every day Australian’s just trying to set themselves up to become self-funded retirees.

“Only 25% of the market in Australia is made up of investors, around 63% home owners and the remainder in government and community housing. Many of these investors are not the top end of town and are really just Mum and Dad investors with only one property they are relying on to be a major part of the retirement plan or debt reduction strategy prior to retiring,

“At just 25% of the market, it is unlikely the proposed reforms will have a sweeping negative impact on the market as the majority of the property market is driven by people needing somewhere to live which is a tax-free asset. So, tax reform will not change the decisions of 63% of the property owners and buyers,” continues Porter.

Anna’s best advice is: “If you are worried these reforms will come into effect, buy an investment property before the election as there is a strong likelihood the changes will be grandfather clause and any existing investments will not be affected”.

Labor has suggested they will still offer negative gearing benefits to investors buying new property. But Porter warns “this can be fraught with danger. Many new and off the plan properties are located in pockets that are oversupplied, such as the Brisbane and Melbourne units, house and land packages around south east and south west QLD and many of Sydney’s Northern and Western suburbs,

“Oversupply will put downward pressure on values and on rental returns. This will mean investors can easily lose more annually in their capital value or lost rent through vacancy than they would have made through the tax benefits. Think of it this way, you get back say $5,000 a year in tax benefits from your investment property because you bought new over established but the capital value retracts by $20,000 per annum due to not getting the investment fundamentals right,

“Or. You could have made an additional $30,000 per annum in capital growth in an established property but you passed that up because you wanted to lock in your $5,000 a year in tax back. Just doesn’t make sense when you crunch the numbers. I see investors falling into the tax trap all the time as opposed to getting the strategy and fundamentals right from the start,” concludes Anna.