What if negative gearing was scrapped?

Let's not panic. While negative gearing has been in the spotlight, and could be cut back to curb perceived excesses, no one is talking about scrapping it altogether. Labor has said that if it wins the next election it will limit negative gearing to new-property purchasers from July 1 next year. It will also reduce the capital gains tax discount from 50% to 25% on new investments from then.

So if I buy an existing property, I won't get any tax deductions?

That's not what is proposed. It's important to understand that "negative gearing" only refers to the losses you're making after deducting expenses (agent's commissions, maintenance, borrowing costs and so on), from the income you receive from the investment (mostly rent). So you will still be able to claim a tax deduction on your expenses up to the level of the income you receive. What you'll no longer be able to do, under the Labor proposal, is deduct the remaining losses against your other income - such as salary. Instead, says Shane Oliver, head of investment strategy at AMP Capital Investors, you'll have to carry forward those losses to a year when you can use them to offset investment income or your capital gain when you sell.

And if Labor doesn't win?

At last count, the Coalition had backed away from any plans to touch negative gearing, though gentle curbs have been recommended by the Murray Financial System Review and the Business Council of Australia. Its official position won't be known until the budget. The government has also said it won't touch the 50% capital gains tax discount, which Oliver argues is the real culprit in drawing investors into negatively geared property, as it greatly reduces the hurdle rate at which they start to make a profit.

What other measures could be on the table?

If the Coalition were to change its mind later, options canvassed included limiting deductible losses to a fixed amount each year (such as $20,000 or $50,000), only allowing negative gearing on one property, or quarantining deductions so they can be offset only against investment income or capital gains. A big sticking point is how existing investors would be treated. The government was under strong pressure to grandfather existing investors, as Labor has proposed. But there is no doubt it could raise more revenue by including existing investors in the net.

What would happen to prices if negative gearing were cut back?

They would be pushed up? They would crash? There have been claims that both would happen. In reality, Oliver says, prices are ultimately driven by a range of factors, the key one being demographic demand. However, Colin Lewis, head of strategic advice at Perpetual Private, says to the extent that potential investors may decide not to go ahead, any measures will obviously have an impact on prices and rents. He says that, if Labor's plans came to fruition, there could well be a rush of investors trying to get into the market before the changes occurred. Oliver says by limiting negative gearing to new properties, Labor is also risking "distortions" in the market as investors will be likely to focus on them. He says measures such as limiting negative gearing to one property could also lead to investors buying more expensive properties to maximise their tax benefits.

So what should I do?

It has been said time and time again that you should never invest purely for the tax benefits and this is also true for negative gearing. Lewis says often investors don't really think about the fact they're making a loss on a negatively geared investment and any changes will put more focus on that. Regulatory uncertainty is one of the very real, but less talked about, risks of investing and any proposed change is an opportunity to review your investment and ensure it still makes sense.

Did you know?

Losses from negative gearing were quarantined for a brief period in 1985 before public pressure - and claims that rents had been pushed up - led to a backdown in 1987. However, an ABC FactCheck last year found rents had risen only in Sydney and Perth after taking account of inflation, and the rise was due to other factors.

The wild card

Little has been said about how Labor's proposed changes would affect investors negatively gearing into other investments, such as shares. Oliver says Labor's proposal appears to apply to shares as well.

Annette Sampson has written extensively on personal finance. She was personal finance editor with The Sydney Morning Herald, a former editor of the Herald's Money section and a columnist for The Age. She has written several books.

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