Affect of Labor's Negative Gearing change = A loss of approx $3,000 a year per investor

Been doing some modelling on the negative gearing changes proposed by Labor. This has caused some controversy in property investment circles due to the impact. It's funny though. On this very blog, I proposed the same policy, way back in March 2015. wonder if Chris Bowan (shadow Treasurer) is trolling my site.

http://economicrigor.blogspot.com/2015/03/new-policy-option-for-government.html


Anyway, lots of talk about the impact...doom and gloom etc, so I figured I would do some analysis to see what the effect was.

Anyway, lets start with some assumptions.

1. House price of $1,000,000
2. Interest only loan of $800,000 at 4%
3. Rents of $600 a week
4. Occupancy of 80%
4. Rental Expences of $5000 a year
5. Other Income of Investor = $80,000
6. Effective Tax rate of investor = 27%
7. No capital appreciation for property

OK.

So @600 a week@80% occupancy for 52 weeks, it means that Income from housing = $24960
 
Interest paid = 0.04*800,000 = $32,000 a year

As Interest is deducable, along with the $5,000 expense, means we have a total loss of $12,040 that i can take away from my $80K income

So without negative gearing, I would be paying $80,000*0.27 = $21,600. With negative gearing, I would be paying $80,000-12,040 = $67960*0.27 = $18,349

That is a saving of $3250 a year.

At a rate of return of 3%, that represents $108333, or 10% of the Purchase price. So either 10% would need to come off the Sale price, 10% added to the rents, or 5% for both.

Not the end of days, but there is an impact.