Almost $250,000 of extra tax over 10 years is the financial cost of buying an established investment property from July next year, instead of a new build, for an average Aussie wage-earner.
For a high-income earner on the top marginal tax rate of 45 per cent, the disincentive to buy established rental properties is nearly $280,000 thanks to the massive Jim Chalmers tax overhaul unveiled in last week’s budget.
A new analysis by The Australian of current and proposed tax rules around negative gearing, capital gains, depreciation and stamp duty highlights just how much investors risk losing to government taxes if they don’t buy new builds, prompting real estate experts to warn that wealthy investors will crowd into the new-home market popular among first-home buyers.
According to our analysis, for an everyday Australian earning a near-average wage of $100,000 who buys a median-priced $1m rental property next year and watches it double in value over a decade before selling in 2037, their tax saving from buying new rather than established property will be $248,000. For a high-income earner on $220,000 a year, the saving grows to $279,250 because people in higher income tax brackets get bigger depreciation and negative gearing benefits.
Property Investment Professionals of Australia chair Cate Bakos said she expected only a “tiny few” investors would continue to buy established rental properties. “It would be very unusual for an investor go for that – they mostly won’t do it because they have been disincentivised pretty strongly,” she said.
“The bigger issue is first-home buyers will be fighting with investors for new stock. The worst-case scenario is that we see price falls across the established house market; the best-case scenario is that we see really slow property growth, which is what the government wanted really.
“That will slow things down for parents because their opportunity to help children traditionally has been around accessing equity.”
Heavy price to invest in established property from 2027
Analysis is based on buying a $1m rental property that doubles in value over 10 years
| Strategy/cost | Impact if on 30% tax rate | Impact if on 45% tax rate |
| Negative gearing benefit | ||
|---|---|---|
| New home | $10,500 annually | $15,750 annually |
| --- | --- | --- |
| Established home | Nil | Nil |
| --- | --- | --- |
| Difference | $105,000 | $157,500 |
| --- | --- | --- |
| Capital gains tax payable | ||
| --- | --- | --- |
| New | $249,000 | $292,000 |
| --- | --- | --- |
| Established | $346,000 | $356,000 |
| --- | --- | --- |
| Difference | $97,000 | $64,000 |
| --- | --- | --- |
| Depreciation benefit | ||
| --- | --- | --- |
| New home | $45,000 | $67,500 |
| --- | --- | --- |
| Established (construction only) | $22,500 | $33,750 |
| --- | --- | --- |
| Difference | $22,500 | $33,750 |
| --- | --- | --- |
| Stamp duty payable | ||
| --- | --- | --- |
| New ($600k of land only) | $17,000-$31,000 | $17,000-$31,000 |
| --- | --- | --- |
| Established | $37,000-$55,000 | $37,000-$55,000 |
| --- | --- | --- |
| Difference | Up to $24,000 | Up to $24,000 |
| --- | --- | --- |
| Tax saved over 10 years | $248,500 | $279,250 |
| --- | --- | --- |
Source: ato.gov.au, state revenue websites, BMT Tax Depreciation, budget papers, RBA
Last week’s budget banning negative gearing for established properties and introducing higher CGT rates for most investors from July 2027 is expected to reshape investment in Australia.
The Australian’s analysis is based on current income tax rates, an investor using their existing equity to borrow 100 per cent of the purchase price, annual inflation of 2.5 per cent – its average over the past 30 years – plus current industry estimates for depreciation tax deductions and other negative gearing costs such as interest, insurance, council rates and property management fees.
Buying new property is now one of Australia’s most tax-advantaged investments because it will be exempt from the negative gearing ban and the new higher capital gains tax regime. Under the CGT changes, future investors will pay a minimum rate of 30 per cent and use inflation-linked indexation to calculate tax payable on shares, exchange traded funds, gold, cryptocurrency and established housing, but new-build investors can still choose to use the older, more generous 50 per cent CGT discount method.
BMT Tax Depreciation chief Bradley Beer said investors buying new was “definitely a positive” from a tax perspective. “You still get your 50 per cent CGT exemption, you get to negative gear … people are going to pay more CGT under the new regime,” he said.
Mr Beer said for young Australians who rented and bought an investment property to enter the housing market, the budget changes “killed the concept”.
A barrier for younger people wanting to invest in new housing is build times, which can be more than 12 months and hit investors with progress payments and interest costs during a period when they do not have a tenant to help them pay for it.
“Building times are slower today, construction costs continually go up,” Mr Beer said. “Concrete’s going up, we’ve got a trades shortage, we’ll probably have more construction cost rises.”
Higher construction costs can help wealthier property investors who benefit from bigger depreciation deductions and bigger tax refunds because of their higher marginal tax rates. Stamp duty is lower for new builds, because only the land component is taxed, and while stamp duties between states differ dramatically, The Australian’s analysis shows buying new can save up to $24,000.
Chartered accountant and Mr Taxman founder Adrian Raftery said future inflation figures and rents received for new builds were key unknowns that would affect financial outcomes for investors.
He noted that while the minimum new CGT rate would be 30 per cent, higher-income earners would pay more when selling assets. This is because the gain, minus the inflation indexation calculation, gets added to an investor’s taxable income in the year of sale. “If your marginal tax rate is 47 per cent (including 2 per cent Medicare levy), you’re paying 47 per cent – you’re not paying 30 per cent,” said Dr Raftery, author of 101 ways to save money on your tax legally.
“If it’s a million-dollar gain but it becomes $850,000 after inflation, the majority of that is going to be taxed at 47 per cent,” he said.
Dr Raftery said he expected to see more investors considering company structures and superannuation where taxes were lower, as well as more partners, siblings and adult children purchasing property jointly to ensure more capital gains were taxed a lower marginal tax rates.
“There will be a lot more people interested in buying new builds rather than existing, and if you have got more people with demand and only so much supply, it’s going to increase price,” he said.
“I think the huge winner is going to be tax accountants.
“For me personally, I know I’m going to have a lot more client meetings over the next two years than what I’ve had in the previous two years. I know the next two editions of my book are going to be a must-read as well because of the changes, so I’ve been a huge beneficiary.”
Original article published here on The Australian.