Property investors brace for new taxes as apartment market shows deep losses

Property investors are already making widespread losses with inner-city apartments, now further tax pain is on the agenda.

Owning a Melbourne apartment is an extended exercise in sending money down the drain. Picture: Supplied

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Mum and dad investors across the residential property sector grappling with severe losses in the apartment market are bracing for more tax rises as the Albanese government paves the way for an overhaul of the tax system.

In the same week new figures highlighted the shock scale of losses faced by investors in city apartments, speculation is mounting that investment taxes, specifically on capital gains and family trusts, are looming in the months ahead.

New research from the Cotality group revealed house prices are powering ahead but apartments increasingly are a standout way to lose money.

More than one in five apartments sold in Melbourne during the March quarter lost money and 90 per cent of loss-making transactions in Sydney were for apartments.

Put simply, property investing in 2025 is a decidedly risky prospect.

The grisly numbers from the apartment market are worse than they seem at first glance. Many investors would have been negatively geared and paid taxes and maintenance charges for years.

The average holding time for loss-making apartments is eight-and-a-half years. These are not just flop deals, they are an extended exercise in sending money down the drain.

Maxwell Shifman, of the Impact Property Group, said the vast majority of losses in dwelling sales are lower-grade investor-focused apartments, not homes.

“Many have unfortunately proved to be terrible investments over the long term,” Mr Shifman said.

Oddly, the most concerning issue of the apartment market gloom, which is largely restricted to Sydney and Melbourne, is that it is occurring as interest rates are being cut and rental demand is intense, with a vacancy rate of near 1 per cent.

A textbook reading of the scenario would suggest this is bargain territory. Apartments must recover soon; they will surely close the gap against houses. But there are other threats emerging and they cannot be ignored.

Property investors are already alert to tax changes thanks to the new super tax.

If a property is held inside a self-managed super fund, it will be a sitting duck for the new tax because it is a lumpy asset, unlike shares (you can’t sell a little bit of a property to avoid the tax which starts in July).

Though this controversial tax on unrealised capital gains, called divisions 296, only affects earnings on amounts in super above $3m, it has sent a shudder among property investors, who are all too familiar with the reality of unrealised gains through the imposition of land tax by state governments.

Analysts expect the government to target capital gains tax on property. Picture: Getty Images

Now the Albanese government is about to launch a major review of all taxes. Once again property is looming as a target.

Treasurer Jim Chalmers started his discussion of the tax review by ruling out changes to two key areas: inheritance tax and taxes on the family home. A process of elimination puts the spotlight on residential tax arrangements that hit property.

The first is capital gains tax. The second is family trust tax arrangements.

At the top end of town, financial advisers have been telling wealthier investors to move assets from self-managed super funds to family trusts. The rationale is, the tax treatment inside family trusts may be better, and at least taxes are imposed on actual gains rather than paper gains.

But the issue that is key for most investors, especially mum and dad investors, is capital gains tax. For many property investors, especially entry-level investors who would dominate the already unreliable apartment market, capital gains is the only game.

That’s because the very high prices now in place in our property market, along with very low yields from rentals, means the only money many investors make on property is the profit on the sale. At present, that profit – or capital gain – is entitled to a 50 per cent discount on capital gains tax if it is held for more than a year.

The speculation is now intense that Chalmers will move to pare back that tax advantage, most likely through reducing the discount.

“I would not rule out changes to negative gearing, but the obvious issue is capital gains tax. I would say that changes there are not just a possibility but a probability,” said Louis Christopher of research house SQM.

A Labor government will have no problem justifying capital gains tax increases because they are related to investor income.

Which leads us to the obvious question of how such a change would affect the market.

Keep in mind that most investors own just one property. They are the backbone of the entire private rental system, where there is already a supply crisis.

They will not have to look too far for a case study. It’s Melbourne, the market with the highest property taxes in Australia. The city should have a vibrant property market; it is a city of five million and yet even its house prices are not doing particularly well.

The city has recently shown the weakest price growth among the major capitals.

And in the black spot of the national market, the Melbourne apartment market, the numbers are abysmal. The performance is the worst since the 1990s. As Eliza Owen of Cotality puts it, it has a lot to do with tax.

There are more than 10 state-based taxes directly affecting property owners in Victoria. Many of them are new, including two introduced this year.

Higher taxes crunch property investment. Victoria is a real-life example. Chalmers is playing with fire.

Originally published as Property investors brace for new taxes as apartment market shows deep losses