Property tax changes likely to kill the ‘house flip’

Property investors tax changes will eliminate the concept of “home flipping”; Because property owners are warned to direct the money to investments with more favorable tax incentives rather than housing and renovations.

While investors appear less active across the country following capital gains tax changes and negative practices announced May 12, experts say there are smarter investments than maximizing your home with renovations.

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

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

“However, most significant renovations do not yield dollar-for-dollar returns, and in most cases, the net financial gain remains modest when transaction costs and construction premiums are included.”

AMP economist My Bui said tax changes announced in last week’s federal budget would reduce the number of homes available to first home buyers.

“I actually think the changes to CGT and the negative gearing mean that investors are encouraged to hold on to their investments for as long as possible,” he said.

“So I don’t think they’re renovating primarily to sell, but they may be renovating to increase 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 property owners to weigh the numbers on renovations, but not everyone will suddenly start ripping out kitchens,” Dr Peng said.

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

“For investors, the situation is more complex. A significant renovation may raise the sales price, but it does not automatically recreate the tax advantages investors used to enjoy,” Dr Peng said.

Tax changes mean that for properties purchased after May 12 this year, the owner will not be able to deduct any losses incurred between collecting rent and paying the mortgage from July 1, 2027. The exception to this is new homes, which may still be negatively affected.

The generous tax relief people enjoy when selling their property (taxed only on half the profit) will be cut from the 50 per cent capital gains tax credit to paying tax only on profits that have been above the rate of inflation since you bought the property. There will also be a 30 percent tax on capital gains from mid-2027.

Economists and accountants tell NewsWire that expanding a home to have more rooms is a surefire way to make a home more valuable; But the most cost-effective renovations include fresh paint, refinishing floors, repairing wiring, making the space look nicer from the street, and targeted kitchen and bathroom improvements.

In light of changes in capital gains, these experts say investing through rollovers is not a smart play.

Dr Peng says the changes could lead property owners to invest more in “tax-favoured assets” such as pensions.

“The troubling point is that these changes could encourage people who already own homes to put even more money into a tax-favoured asset. Renters and first home buyers don’t have that option.”

“From a housing supply perspective, renovating an existing home makes it nicer, but it doesn’t put a new roof over someone else’s head.

“Households should not view renovation as a tax dodge. Renovating your own home may make financial sense, but it also allows more wealth to be concentrated in an illiquid asset.”

Brisbane Ray White agent Christine Rudolph said buyers were using two different tactics since the capital gains and negative hearing amendments were announced.

“The first is to sell the existing family home and upgrade to a larger property with scope for renovation and value addition,” he said.

“The second is to keep the primary residence, turn it into an investment property, and use the equity to build into a larger home.”

These plans show clear strategic thinking, Ms. Rudolph said.

“They are exploring how to preserve wealth, maximize tax efficiency and secure quality housing in a market where supply is incredibly tight.”

Despite the tax changes, the New Farm agent said a “chronic shortage of quality housing”, a growing population and almost no homes for sale in “perfect” suburbs were factors making renovations attractive in the face of high building costs.

Ms Rudolph had noticed an influx of tradespeople into Queensland as the state built infrastructure for the 2032 Olympics.

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

“Everywhere you look in Brisbane, people are putting money into their homes. Most homeowners understand that securing the right trades can take time and patience, and they are willing to expect quality.”

But there is a shortage of tradesmen throughout the country.

Trivess Moore, from RMIT University’s School of Real Estate, Construction and Project Management, said many homeowners couldn’t even get a handyman to get a quote.

“We are hearing from conversations with households that it is becoming increasingly difficult to find quality tradesmen to do work or even come forward to quote,” Dr Moore said.

“We need to go beyond the renovations we’ve seen before in kitchens and bathrooms to improve liveability, health and wellbeing, reduce energy bills and deliver a range of other benefits that sustainable retrofitting can deliver.

“There are some low-cost options that are often overlooked but offer good value for money, such as insulation and draft protection, and more important options such as upgrading single glazed windows to double glazed.”

Renovations may be an investment option for homeowners following tax changes, but this too immediately ties up funds irreversibly.

“We will potentially see smart owners looking for ways to maximize property value and outcomes through retrofitting and general renovations,” Dr Moore said.

“Given the current market, there are some challenges with the timing and cost of significant refurbishment and some refurbishment, so a potential buyer may appreciate not having to carry out this work themselves.

“As we see more open buyers, we see more evidence that sustainability features are becoming more desirable and we may see an increase in the value of those things.”