A loophole in the federal government’s move to abolish negative gearing will allow millions of Australians who currently own their own home to continue to access the tax breaks after July 2027.Treasurer Jim Chalmers last week announced the major tax reforms as part of the federal budget, which include winding back the tax concession for property investors from July next year in an effort to help younger Australians trying to enter the housing market.
Until now, any homeowner was able to deduct a net loss from a residential investment property from their overall income, thereby reducing their yearly tax bill.
The federal government hopes winding back negative gearing will assist younger Australians get into the property market. (Peter Rae)
From July 2027, that will only apply to new build homes, superannuation funds and those who purchased their properties prior to budget night.
A spokesperson for Chalmers has now confirmed to the Australian Financial Review (AFR) that those property purchases also include owner-occupiers.
This means that Australians who currently own their home bought before budget night could later purchase another property and convert their current home into a negatively geared investment.
KPMG chief economist Brendan Rynne told the AFR the grandfathering arrangements would mean existing owners of both investment properties and owner-occupied homes would be more likely to hold on to their properties so they could retain the option to negatively gear.
Prime Minister Anthony Albanese and Treasurer Jim Chalmers delivered some major changes in last week’s federal budget, with negative gearing changes being among the most controversial. (Alex Ellinghausen)
“What that’s going to mean is that that housing turnover is probably going to be a bit less than what we’ve seen in history,” Rynne said.
It’s thought that defining investment property status in legislation would have been prohibitively complex, so the loophole was likely deemed a necessary part of simplifying the reforms.
The negative gearing exemptions may seem friendly. One property expert warns it’s a’ trap’
The friendly tax exemption which still allows newly-built homes to be negatively geared may be a “trap” for inexperienced investors, a property expert has explained.While negative gearing will be abolished from July next year for established properties bought after the 2026 Federal Budget, investors who purchase brand-new homes can still offset any net losses from their yearly taxable income.
This could inspire new investors to buy into sprawling apartment developments or house-and-land packages on the outskirts of major cities – but these types of properties historically “underperform” as investments.
Property investment guru and Your Empire chief executive Chris Gray. (Supplied)
Property investment guru and Your Empire chief executive Chris Gray said the federal government’s new build exemption may “screw investors” who buy solely based on their freedom to apply negative gearing.
“These massive towers in Docklands in Melbourne or Zetland in Sydney, or the thousands and thousands of blocks of land where all the properties are the same, there is not necessarily lots of natural demand and typically they don’t grow in value,” Gray told Nine.com.au.
“It’s basic economics. If something’s in short supply and lots of people want it, the price goes up. Where you’ve got lots of supply, it won’t.”
New builds and house-and-land packages historically underperform as investmets. (Rob Homer)
First-time Australian 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 break and buy an existing property.
Gray, who has 30 years of experience buying and selling property, said seasoned investors will know to give new builds a wide berth.
He would still choose the option of buying a second-hand home in a high demand area, despite the chance it won’t be positively geared for at least a decade.
Some inexperienced buyers, however, could still be fooled by something called “manufactured capital growth”.
And it could take years before the reality of their bad investment sinks in.
“Developers might sell 20 at a time and slowly release them. They sell the first lot at say $500,000 and the next one at $525,000 and then $550,000,” Gray added.
“Everyone thinks that it’s rising, but it’s not.
“It’s not until you get someone selling it to another person in maybe five years’ time that you actually realise, potentially, the property hasn’t grown in value at all.”
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