Why expert property investors aren’t concerned about changes to negative gearing
It has been years and terms of politicians attempting to bring about changes to negative gearing, but only as of this year, they seem to have taken action. Back in May, we looked at what the new proposed law changes meant for investors and in this month’s blog, master investor Ian Hosking Richards looks at the potential future effects for investors.
In the almost twenty years that I have been actively investing, the subject of negative gearing has been a hot topic. Yet, despite all the talk and blustering, little has actually changed. Until now.
So should we be worried? The short answer is no. Why? Let me explain.
Growth - not tax benefit
The main reason you buy a property is the potential for capital growth. You should never buy a property simply to get a tax rebate. Remember, the very generous tax treatment that Australian resident tax payers are entitled to claim simply does not exist in the vast majority of countries. Yet there are many property investors in these other countries that have created extraordinary wealth, all without the benefit of negative gearing.
Your focus should not be how much a particular property will cost you to own now, but rather how much wealth it will create for you in the future.
New properties are unaffected
If you use the right strategy you will still be able to claim a generous tax benefit similar to what was available to you pre-budget. The changes mainly relate to the purchase of established properties, where fixtures and fittings have already been depreciated by a previous owner. Until these changes are legislated a lot of the detail is missing, but it appears that purchasing new property will be exempt from these changes.
My strategy has always been to buy new. It allows me to attract a premium tenant. I can anticipate my cash flow much more accurately as I will not incur any unexpected expenses in the early years of ownership. It also allows me to choose a builder that I trust. And crucially, my strategy exempts me from the recent tweaks to the rules. So for me, there will be very little change. Business as usual.
For those who have followed a different strategy, i.e buying established properties, they may want to re-consider this in light of recent changes, whether this is still the best strategy. They may even find that a ‘buy new’ strategy works better for them than their previous strategy prior to the changes. If, like me, you want an affordable property with great potential for capital growth, that pays for itself, doesn’t cause any headaches, and helps you to achieve your long term goals, a change in strategy might help you to still reach your goals, and more quickly and easily than you had imagined.
Whilst a negative gearing benefit can help to cashflow a property, it is not essential in creating wealth through property. The residents of many other countries manage quite well without having to rely on the government subsidising their private investments. However, the new rules will affect certain investors more than others, and it will still be possible to get substantial help from the ATO if you select the right type of property.
This response by Ian to the proposed Federal Budget changes was first published in Your Investment Property magazine in their August 2017, No.121 edition.