Negative gearing ‘loophole’ to allow millions of home owners to access tax breaks

Until now, any homeowner could deduct a net loss on an investment home from their total income, reducing their annual tax bill.

From July 2027, this will only apply to new-build homes, pension funds and those who bought their properties before Budget night.

A spokesperson for Chalmers has now confirmed to the Australian Financial Review (AFR) that these property purchases also involve owner-occupiers.

This means that Australians who currently own their home purchased before budget night can later purchase another property and convert their current home into a negative-biased investment.

KPMG chief economist Brendan Rynne told the AFR that the ‘grandfathering’ arrangements would mean that existing owners of both investment and owner-occupied properties would be more likely to hold on to their properties, thus retaining the ability to take a negative stance.

“What that’s going to mean is that housing turnover is probably going to be a little bit less than what we’ve seen historically,” Rynne said.

It is thought that defining the status of investment properties in the legislation would have been prohibitively complicated, so the loophole was likely seen as a necessary part of simplifying the reforms.

The negative gearing exemptions may seem friendly. One real estate expert warns it’s a ‘trap’

This could inspire new investors to buy into sprawling apartment complexes or house-and-land packages on the outskirts of major cities – but these types of properties have historically performed ‘poorly’ as investments.

Property investment guru and CEO of Your Empire Chris Gray said the federal government’s new build exemption could “screw” investors who buy solely based on their freedom to apply negative gearing.

“It’s basic economics. If something is scarce and a lot of people want it, the price goes up. If there’s a lot of supply, that won’t happen.”

Australian first-time investors who weren’t lucky enough to buy before 7:30pm on budget night now have two choices: buy a newly built home for the negative gearing benefit, or lose the tax benefit and buy an existing property.

Gray, who has 30 years of experience buying and selling real estate, says seasoned investors will know how to give new construction a wide berth.

He would still choose the option of buying a second-hand home in an area that is in high demand, despite the likelihood that this will not be positive in the next ten years.

However, some inexperienced buyers can still be fooled by something called “manufactured capital appreciation.”

And it may take years for the reality of their bad investment to sink in

“Developers can sell 20 at a time and release them slowly. They sell the first lot for, say, $500,000 and the next for $525,000 and then $550,000,” Gray added.

‘Everyone thinks it’s rising, but that’s not the case.

“It’s not until you have someone sell it to someone else in maybe five years that you realize the property may not have grown in value at all.”

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