Property tax changes likely to kill the ‘house flip’

Property investor tax changes will kill the concept of “housing flipping”, as owners are warned to divert money away from housing and renovations into investments with more favourable tax incentives.

As investors appear less active across the country in the immediate wake of changes to capital gains tax and negative gearing announced on May 12, experts say there are smarter investments than maxing out your home with renovations.

“I would say the day of the ‘house flip’ is over – or on a long pause,” Griffith University housing expert Rachel Gallagher said.

“For many households, renovating an existing home can be a more controllable and emotionally attractive form of ‘investment’ than entering a high-priced market.

“However, most substantial renovations are not delivering dollar-for-dollar returns, and in many cases the net financial gain is modest once transaction costs and construction premiums are included.”

AMP economist My Bui said tax changes announced in the federal budget last week would reduce the number of existing homes on offer for first-home buyers.

“I actually think that the changes to CGT and negative gearing just means that investors are basically incentivised to hold on to their investments for as long as possible,” she said.

“So I don’t necessarily see them renovating to sell, essentially, but they might be renovating so that they can improve the rental appeal of their properties.”

University of Queensland accounting lecturer Natalia Peng said renovations were tax-efficient but not necessarily profitable.

“I would expect more owner-occupiers to run the numbers on renovating, but not everyone will suddenly start ripping out kitchens,” Dr Peng said.

“The family home remains one of the most tax-favoured assets Australians can own.

“For investors, it is more complicated. A substantial renovation may lift a sale price, but it does not automatically recreate the tax advantages that investors used to have,” Dr Peng said.

The tax changes mean for properties purchased after May 12 this year, the owner cannot deduct any loss they make between collecting rent and paying the mortgage from July 1, 2027. The exception is new homes, which can still be negatively geared.

The generous tax break people enjoyed when selling their property – only being taxed on half the profit – will be slashed from a 50 per cent capital gains tax discount to paying tax on the profit that is only above the rate of inflation since you bought the property. Also kicking in from mid-2027 is a 30 per cent tax on capital gains.

Economists and accountants tell NewsWire making a home larger to have extra rooms is the most certain way to make a home worth more, but the most cost-effective renovations are fresh paint, repairing floors, wiring, making the place look nicer from the street, and targeted kitchen and bathroom upgrades.

In light of the changes to capital gains, these experts say investing by way of renovations is not the smart play.

Dr Peng says the changes may make property owners put more into “tax-preferred assets” like superannuation.

“The uncomfortable angle is that these changes may encourage people who already own homes to put even more money into a tax-preferred asset. Renters and first-home buyers do not have that option.,” she said.

“And from a housing supply point of view, renovating an existing home makes it nicer, but it does not put a new roof over someone else’s head.

“Households should not treat renovation as a tax hack. Renovating your own home can be financially sensible, but it also concentrates more wealth in one illiquid asset,”

Brisbane Ray White agent Christine Rudolph said since the capital gains and negative hearing changes were announced, buyers had been using two distinct tactics.

“The first is selling the existing family home and upgrading into a larger property with scope to renovate and add value,” she said.

“The second is holding the principal place of residence, converting it into an investment property and using the equity to upgrade into a larger home.”

These plans showed clear strategic thinking, Ms Rudolph said.

“They are looking at how to protect wealth, maximise tax efficiency and secure quality housing in a market where supply remains incredibly tight.” she said.

Despite the tax changes, a “chronic shortage of quality housing”, a growing population and barely any houses for sale in “blue-chip” suburbs were factors making renovations attractive in the face of high building costs, the New Farm agent said.

Ms Rudolph had noticed a flow of tradies into Queensland as the state builds the 2032 Olympics infrastructure.

“There is strong demand for quality trades, and good operators are busy.

“Everywhere you look across Brisbane, people are investing money into their homes. Most homeowners understand that securing the right trades may take time and patience, and they are prepared to wait for quality.”

But there is a shortage of tradespeople across the country.

RMIT University School of Property, Construction and Project Management’s Trivess Moore said many homeowners were unable to even get a tradie in for a quote.

“We are hearing from interviews with households that it is increasingly difficult to find good quality tradies to do work or even come to provide quotes,” Dr Moore said.

“We need to move beyond how we have seen renovations previously in terms of kitchen and bathrooms to improving liveability and health and wellbeing, reducing energy bills, and a range of other benefits which sustainability retrofit can deliver.

“There are some lower cost options like insulation and draught proofing which are often overlooked but good bang for buck, through to more significant options like upgrading single glazed windows to double glazed.”

Renovations could be an investment option for homeowners in the wake of the tax changes, but again that course tied up funds with no immediate return.

“Potentially we will see those clever owners looking for ways to maximise property value and outcomes through retrofit and general renovations,” Dr Moore said.

“Given the current market there are some challenges with timing and cost of significant renovation and some retrofit work, so a potential buyer may appreciate not having to do that work themselves.

“As we see more switched-on buyers, we are also seeing more evidence that sustainability features are becoming more desired and could also see an increase in value from those things.”