How renters can use CGT and negative gearing to their advantage

Capital gains tax and negative gearing may not be the enemy of renters trying to get on the property ladder.

Renters should consider using negative gearing to buy a property in a cheaper area. Picture: AFP

It has been a tough couple of years for property investors, and just as the situation was starting to look up with interest rate relief on the horizon, a spanner has been thrown in the works, with Treasurer Jim Chalmers asking Treasury to review winding back capital gains tax (CGT) concessions and negative gearing benefits – ideas thought to be dead and buried.

The Greens have been piling on pressure and say they will continue to block one of Labor’s key housing initiatives in the Help to Buy Bill until they get their way on having CGT concessions and negative gearing benefits wound back.

Greens housing spokesman Max Chandler-Mather says: “Labor went from refusing to negotiate with the Greens on negative gearing and CGT, to actively considering changes. It is good to see negotiations may have finally begun to scrap the tax handouts denying renters the chance to buy a home.”

The thing to remember is that ABS data indicates that 71.5 per cent of investment property owners own one investment property and 18.9 per cent own two. In other words, less than 10 per cent of property investors have more than two properties, making property investment firmly the domain of the everyday mum and dad investor trying to get ahead.

In a differing view, Greens leader Adam Bandt feels that investment properties are something that the rich accumulate like socks on the floor of a teenager’s bedroom, saying: “These unfair tax handouts (CGT concessions and negative gearing benefits) are driving the rental and housing crisis. They help wealthy property investors buying their seventh property and hurt renters trying to buy their first home.”

But ABS data shows that in 2022 only 10,879 people owned seven or more investment properties out of the 2.27 million owners – making up around 0.5 per cent of investment property owners. So if negative gearing is primarily used by mum and dad investors who own a single investment property, is it really such a bad thing?

For renters, it can be quite disheartening to try to save while watching property prices rise. Their ability to save can be outpaced by the growth in the market, and they fall further behind.

That said, there is a strategy astute renters have used to fast-track buying a home. It involves using negative gearing benefits and CGT concessions to help, rather than hinder, their home ownership goals. This is how it is done: Renters who can’t afford to buy their dream home are buying investment properties in cheaper areas with strong expected capital growth. They are using investment property as a ‘‘stepping stone’’ to achieve the great Aussie dream of owning a home.

At the onset of Covid in early 2020, the average property price in Perth was $479,000, and $440,000 in, whereas in Sydney it was $1.14m and $880,000 in Melbourne. Fast forward to 2024, the Perth property market has increased by over 60 per cent and growth in Adelaide is not far behind, whereas Melbourne has risen by less than 20 per cent.

If someone bought in Adelaide or Perth as an investment four or five years ago and saved thousands each year in tax through negative gearing and then sold the property in 2024 paying CGT at the reduced 50 per cent rate, they are hundreds of thousands of dollars ahead and likely to be in the box seat to purchase a home in their local capital city.

But this approach has significant risk. If the property is purchased in an area that experiences disappointing capital growth, the owner might be stuck with a property they can’t easily sell.

Darwin is a good example of this. Since 2020 the Darwin property market has only increased by 10 per cent whereas Sydney property prices are up over 50 per cent. If someone picked Darwin, this strategy has not paid off yet.

Putting aside investment property and location risk, not all renters keep their savings in the bank. Many invest in ETFs and shares to grow wealth and save for a deposit. Some also use gearing, either borrowing against the equity of an investment property or taking out a margin loan against their share portfolio. If CGT and negative gearing changes are made, these people will be impacted.

Finally there are the ‘‘rentvesters’’ who are happy long-term renters. They prefer to rent where they want to live and use their borrowing power to accumulate investment properties, building wealth for retirement. Again, if changes are made to CGT negative gearing, this group of renters will also be adversely affected.

An alternative to changing CGT and negative gearing would be to look at the success in Singapore, where home ownership rates have increased from 9 per cent to 90 per cent. The government-owned Housing Development Board (HDB) has built over one million affordable homes since its establishment in 1960 and 80 per cent of Singapore residents have purchased from the HDB.

Coupled with other housing policies such as strong financial assistance for first-home buyers and prioritising citizens over foreign ownership of property, Singapore now has one of the world’s highest home ownership rates.

For the Albanese government, which is moving into an election year, the unwanted Pandora’s box has now been opened on negative gearing and CGT changes. Although they have firmly said there are no plans to change current rules, many higher income earners will remember a similar rhetoric when it came to the recent stage 3 tax cuts, which ultimately were cut by 50 per cent.

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au