Kellie Landrey Principal Buyers Agent at Scoutable, shares with the Fox and Hare crew the potential impact of the pending federal election on aspiring property investors.
With many news outlets and polls expecting Labor to win, their proposed policy changes will have a potential impact on the property market. ?
According to news.com.au, 1.3 million people or 10% of taxpayers use negative gearing to claim a tax break.
Negative gearing is when the interest on the loan is higher than the net rental income, meaning the investor is making a loss. The loss is claimed as a tax deduction. The net rental income is the rental income minus the expenses associated with owning the property, such as maintenance, management and depreciation.
For example, your loan interest repayments are $30,000 per annum and you have $5,000 per annum of property expenses. If your rental income is $20,000 per annum, this gives a loss of $15,000. This means you can reduce your taxable income by $15,000. For someone who is earning $100,000 per annum, their taxable income will now be $85,000 per annum. You will reduce your tax payable and save just under $6,000.
Labor is proposing to remove the right to claim these losses (negative gearing) to all established properties from 1 January 2020 (new build properties not affected). Any investment property purchased prior to 1 January 2020 will continue to be able to claim negative gearing.
Capital Gains Tax
When you sell your investment property you are required to pay tax on the profit.
Capital gains tax does not apply to your principal place of residence.
Currently, the capital gains tax rule provides a 50% discount (as long as you have owned the property for one year). For example, you purchase an investment property for $1,000,000 and sell it over one year later for $1,200,000, your profit is $200,000. Applying the 50% discount, you must add $100,000 to your taxable income in the financial year that you sold the property. Labor proposes to reduce the discount from 50% to 25%. Following the above example, you will add $150,000 to your taxable income.
Any investment made prior to 1 January 2020 will remain at the 50% discount rule.
With the possibility of a labor win, it may be a good time to consider investing before 1st January 2020.
If you would like to discuss negative gearing or capital gains tax further, book in a coffee with Fox & Hare ☕. To learn about Scoutable’s services and how they can assist with your property search, click here.