A landlord with 200 properties has warned that rookie investors are set to be 'wiped out' by sweeping reforms to negative gearing and capital gains tax expected in tonight's Federal Budget. Serial investor and buyers' agent Eddie Dilleen, 32, has expanded his portfolio by around 120 homes in the past year, but he remains unconcerned about the scrapping of property tax incentives when Treasurer Jim Chalmers delivers the Budget on Tuesday.
Labor's Expected Reforms
Labor is anticipated to abolish negative gearing for future investment properties and replace the 50 per cent capital gains tax discount with an inflation-indexed concession. While existing rental properties and new builds may be exempt, there is also speculation about limits on the number of properties an individual can negatively gear. None of these details will be confirmed until the Budget is tabled at 7.30pm.
Dilleen's Unfazed Stance
Regardless of the outcome, Dilleen, who told the Daily Mail he owes $60 million in mortgage repayments, is unfazed and plans to continue acquiring 'undervalued' residential properties across Australia. He will advise his clients to do the same. He stated that 'rookie investors trying to get started will be wiped out' by the reforms, but he has never personally relied on negative gearing as a strategy.
'Some of my properties are negatively geared, but the worst shortfall after expenses is only about $70 to $80 per week,' he said. 'That's unfortunately not the case for the majority of investors, and they'll really hurt when this happens because they've bought property that's negatively geared at $500 to $600 per week - and they've bought two or three.'
Impact of Negative Gearing Changes
Under the current negative gearing tax policy, investors can offset losses against their income, reducing taxable income and potentially lowering their tax bracket. The new scheme will stop this practice going forward, possibly forcing landlords who rely on buying properties to negatively gear to consider alternative financial strategies.
Common Investor Mistakes
Dilleen said the biggest mistake buyers make is using their first investment for a big house, which is often cashflow negative and unlikely to be offset under the new laws. He noted that it often takes two or three houses to generate wealth or accrue enough equity to buy a big house for retirement.
'The strategy is to have a property that might only be negative $70 a week, but if you're buying a big house with a lot of negative cash flow, it's not sustainable,' he said. 'Everyone wants to buy the biggest house straight away, but I bought what I could afford.'
Property Values and Equity
Dilleen also does not care if property values fall by as much as 50 per cent after the changes, because he can still use equity from his portfolio to grow his holdings, which is not an option for most asset classes. 'At the end of the day, property is a leveraged asset and you can get into it with only 20 per cent,' he said. 'If I wanted to buy $1 million worth of shares, I'd need $1 million in cash. But with property, I can get a 20 per cent deposit using the equity from my other properties - and it's tax-free.'
Modelling suggests property prices could fall by up to four per cent under the reforms, rather than 50 per cent.
Capital Gains Discount Concerns
Asked about the potential removal of the capital gains discount, Dilleen warned it could force investors who do not rely on negative gearing to hold their assets, further throttling the market. 'Out of the 200 properties I own, why would I sell them if I'm going to get smashed with tax?' he asked. 'I'd rather pull out the equity and use it for another property - that's what billionaires do, they don't sell.'
Investment Strategy for Existing Homes
Despite speculation that negative gearing and the capital gains discount could remain in place for new builds, Dilleen said he would continue investing in existing homes because they are more affordable. 'People will move to off-the-plan, but it's ridiculously overpriced,' he said. 'I'm buying established units in Melbourne for half the price of off-the-plan units in the same street.'
Advice for Australians
Mr Dilleen was relaxed about the tax changes, urging Australians not to worry about any changes the government might make because there is nothing they can do about it. 'There's always changes to laws and legislation, but people stop worrying about the changes and the flow-on effect and focus on what they can actually do,' he said. 'I don't look at the outside stuff, I can only control what I can control and what I can do right now.'
What is Negative Gearing?
Landlords can claim a rental loss against their taxable income, an arrangement known as negative gearing. Even if they do not make a loss, they can claim expenses from interest payments to council rates and property maintenance to reduce their taxable income. In the 2019-20 financial year, 35 per cent of people who claimed rental deductions were in the top group of taxable income earners.
Treasury calculated that in 2019-20, 2.4 million people claimed $51.3 billion in rental deductions against their taxable income. This cost the Budget $18.6 billion in forgone revenue as 1.3 million people claimed a loss from rental income failing to keep pace with mortgage repayments. The 'other rental deductions' category was claimed by 47 per cent of taxpayers claiming rental expenses on tax, including council rates and property maintenance. Another 44 per cent claimed interest deductions, while nine per cent claimed capital works. Australians claimed an average deduction of $7,790 from rental deductions.
