Is the new property tax reform actually that bad? Lets run the numbers...
Everyone is losing their mind overnight... Let's run the actual numbers before we panic.
The headlines are screaming about the end of negative gearing and the CGT discount. What they're missing is an important mechanic buried in the budget paper, your quarantined losses don't disappear. They accumulate and come back to offset your capital gain at exit. That changes the math.
Here's what the reform actually does:
- Negative gearing losses can no longer reduce your wage income immediately. They get quarantined and carried forward.
- The 50% CGT discount is replaced with CPI indexation, you only pay tax on the real gain above inflation.
- A 30% minimum tax floor applies at exit.
I've worked out two investment scenarios with different growth rates and holding periods and calculated the impact to the total return to the investor under the old and new tax regime.
Open to hear people's thoughts on this?
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Scenario 1 - Assumptions
- $650k property, $100k deposit, $550k loan @ 6.5%
- Interest: $550k × 6.5% = $35,750/yr
- Rent: $650k × 5% = $32,500/yr (5% yield)
- Less expenses $6,750 = $25,750 net rental income
- Shortfall: $35,750 − $25,750 = $10k negatively geared
- 5 year hold
- 20% CAGR, sale price $1.3m
- Marginal rate 47%, CPI 2.5%
- Indexed cost base: $650k × 1.025^5 = $735.4k
Pre-Reform
- Annual tax refund on shortfall: $10k × 47% = $4,700/yr
- Effective out of pocket: $10k − $4.7k = $5,300/yr
- Total hold costs over 5 years: $5,300 × 5 = $26,500
- Nominal gain: $1.3m − $650k = $650k
- CGT: $650k × 50% discount × 47% = $152,750
- Net equity at sale: $1.3m − $550k (loan) − $152,750 (CGT) = $597,250
- Net wealth: $597,250 − $100k (deposit) − $26,500 (hold costs) = $470,750
Post-Reform
- No tax refund, losses quarantined, zero immediate benefit, full $10k out of pocket every year
- Total hold costs over 5 years: $10k × 5 = $50,000
- At exit, losses come back and hit the gain first
- Real gain after indexation: $1.3m − $735,400 = $564,600
- Less quarantined losses: $564,600 − $50,000 = $514,600 taxable
- CGT: $514,600 × 47% = $241,900 (47% exceeds 30% floor so full rate applies)
- Net equity at sale: $1.3m − $550k (loan) − $241,900 (CGT) = $508,100
- Net wealth: $508,100 − $100k (deposit) − $50k (hold costs) = $358,100
The damage
- Net wealth: $470,750 vs $358,100 = $112,650 worse off
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Scenario 2
Now, lets assume 50% total growth over 3 years (16.6% CAGR). Ultimate sale price of $975k
Pre-Reform
- Annual tax refund on shortfall: $10k × 47% = $4,700/yr
- Effective out of pocket: $10k − $4.7k = $5,300/yr
- Total hold costs over 3 years: $5,300 × 3 = $15,900
- Nominal gain: $975k − $650k = $325k
- CGT: $325k × 50% discount × 47% = $76,375
- Net equity at sale: $975k − $550k (loan) − $76,375 (CGT) = $348,625
- Net wealth: $348,625 − $100k (deposit) − $15,900 (hold costs) = $232,725
Post-Reform
- No tax refund, losses quarantined, zero immediate benefit, full $10k out of pocket every year
- Total hold costs over 3 years: $10k × 3 = $30,000
- At exit, losses come back and hit the gain first
- Real gain after indexation: $975k − $700k = $275k
- Less quarantined losses: $275k − $30k = $245k taxable
- CGT: $245k × 47% = $115,150 (47% exceeds 30% floor so full rate applies)
- Net equity at sale: $975k − $550k (loan) − $115,150 (CGT) = $309,850
- Net wealth: $309,850 − $100k (deposit) − $30k (hold costs) = $179,850
The damage
- Net wealth: $232,725 vs $179,850 = $52,875 worse off