Is rentvesting dead? Tax reform to push people away from popular strategy

The government’s proposed tax reform could destroy rent vesting for younger generations, an expert has warned.

Renting is a popular strategy typically used by younger people to rent in an area that suits their lifestyle while owning an investment property in a cheaper area.

But last week’s changes to the capital gains tax credit and negative gearing are likely to move people away from rent vesting, said Dr Sherman Chan, chief economist at the Australian Property Institute.

“As with all forms of property investment, people will now think twice before getting into rentvesting,” she said.

Chan said the rentvesting strategy will soon cost people more as investors lose profits due to higher taxes, and the expected decline in investment properties puts upward pressure on rental prices.

“Overall, the appeal of the rentvesting strategy will be greatly diminished from a return on investment perspective,” she said. 

Under the proposed new rules, negative gearing will no longer apply to homes purchased after 7.30pm on May 12.

The capital gains tax rebate on properties purchased after the same time will also be adjusted for inflation and then subject to a less generous minimum rate of 30 percent.

While the Treasury predicts that these changes will help 75,000 people get into the housing market over ten years, it also expects that 35,000 fewer new homes will be built in that time.

Purchases of new construction are exempt from both policies.

Chan said the changes are aimed at encouraging investors into new construction, increasing supply and attracting first-home buyers to existing properties. 

The government has raised questions about how its changes, which have not yet been passed by parliament, will affect tenants.

Treasurer Jim Chalmers told the ABC yesterday that renters can continue to take advantage of the generous tax breaks on a home they already own or if they buy a new build.

He added that the changes would only affect a small number of young people who have negative housing attitudes.

“The closest we get to an accurate figure is that about 5 percent of people under 35 have rental income, but that includes owner-occupiers, it includes people who have positive and negative attitudes,” he said.

“So more than 5 percent of people under the age of 35 do this.

“They can continue to do this if they invest in new construction, and they can continue to do it if they already own that house before budget night.”

NEVER MISS A STORY: Be the first to receive your latest news and exclusive stories by following us on all platforms.