ALP changes to Negative Gearing and Capital Gains Tax
The Australian Labor Party (ALP) has announced several changes to negative gearing and capital gains tax that will impact property investors should they be successful in the 2019 federal election:
What is negative gearing?
Negative gearing allows property investors to offset losses made by their investment properties against their personal income, providing them with a tax credit.
For example: Bob earns $100,000pa working as a public servant. He has an investment property on Beagle St that makes a loss of $10,000pa. Negative gearing means that Bob only pays tax on $90,000pa, saving him $3,700 in tax.
Proposed Changes to Negative Gearing
The ALP has proposed changes to negative gearing laws. These changes will not apply to investment properties purchased before the start date (yet to be announced), which will be given grandfather rights.
- Negative Gearing will apply to newly constructed properties only. For example, if Bob buys a brand new investment property at Bassett St, he will be able to negatively gear the property just like he did for Beagle St.
- No negative gearing will apply to the purchase of second-hand homes. For example, if Bob buys an older/established investment property he will not receive any tax credit should his investment property make a loss. He can however carry these losses forward to offset the final capital gain on his investment.
Capital Gains Tax
What is Capital Gains Tax?
A capital gain (or loss) is the difference between what it cost you to buy a property, and what you receive when you sell it. The tax payable on this amount depends on how long the asset has been owned. Currently:
- for properties owned for less than 12months, tax is paid on the entire capital gain.
- for properties owned for more than 12 months tax is paid on 50% of the capital gain.
This amount is then added to an individual’s personal income, and taxed according their marginal tax rate.
Proposed Changes to Capital Gains Tax
If elected, a Labor government will reduce the capital gains discount for properties held for more than 12 months from 50% to 25%. This change will not effect investments purchased prior to the start date (yet to be announced). There will be no change to the Capital Gains Tax payable on properties owned for less than 12 months.
For more information on ALP changes to Negative Gearing and Capital Gains Tax visit the Labor Party Website at: https://www.alp.org.au/negativegearing
How are these changes likely to impact investor activity and property prices?
Government elections typically create uncertainty in the market, resulting in buyer inactivity and stagnation in property prices. Given the proposed changes to negative gearing and Capital Gains Tax we may even see a surge of investor activity in early 2019 from people wanting to get into the market before these changes take effect.
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