Do the latest investment laws affect your property portfolio?

THE problem with the best things in life is that often you can only enjoy them for so long before someone finds a way to rain on your parade.

Such is the story for Australian property investors, who’ve enjoyed a golden era over the last 10 years, riding the property boom to wealth creation and enormous increases in the value of their portfolio.

And yet now – inevitably – they’re slowly being reined in amid a number of changes to property legislation, many of which are designed to swing things back in favour of first home buyers and owner-occupiers.

We take a look at a couple of the recent changes to laws that affect investment properties and investors.

The "vacancy tax"

Ever drive past new, large inner-city apartment buildings in the early evening and notice that a great number of them have no lights on?

Chances are they’ve been bought by investors – many of them from overseas – who are happy to simply sit on the property and leave it vacant, with no tenants.

But as of January 1 this year, any property in Victoria that is left vacant for a combined six months in any 12-month period will be subject to a tax equal to 1% of the property’s market value.

The rule applies to properties in Melbourne’s inner-city and middle suburbs, and has been touted as a way of improving the city’s tight rental market by discouraging buyers from warehousing the properties they purchase, as well as shepherding investors away from properties that could otherwise be purchased by first home buyers.

But Metropole Property Strategists CEO Michael Yardney says it’s unlikely the laws will have any noticeable effect on either the property renting or buying markets.

"Overseas investors like the concept that the house is nice, new and clean. They’re not really looking for the rental returns and they figure that if they leave it nice and new and vacant it’ll be a good investment in the future," Yardney says.

"It’s unlikely it’s going to deter them from buying. $5000 (in extra taxes) or so each year is not going to stop them. I don’t think it’s going to make a difference to extra supply."

Yardney also says the laws won’t affect most Australian investors.

"Local investors need the returns. They’re not going to leave them vacant," he says.

Depreciation and negatively geared assets

One of the most significant changes to investment property legislation introduced in recent years is the way in which depreciation is able to be claimed.

Similar to the way most investors claim negative gearing benefits – reducing their tax by claiming the shortfall between their loan repayments and what the property earns in rent – many investors have also claimed money back on the depreciating value of the fittings, fixtures and appliances within their investment property, no matter how old the property is.

But Yardney says that all changed last year when the Federal Government launched laws to stop people depreciating second-hand items, or items that they inherited from the previous owner of a property, like carpet, curtains and other fittings.

"The purpose behind this was that people were double dipping," Yardney says.

"You could have owned a property, depreciated the property and the curtains and other things for five years. Then I buy it off you and get a depreciation schedule and I could double dip and (claim the depreciation) as well," he says.

The new laws are intended to prevent investors from claiming depreciation on established properties, while encouraging buyers to considering buying new or off-the-plan homes, which Yardney says is "naïve".

And he says the law has had a limited impact on investors’ appetite for property.

"You don’t buy a property for tax purposes. You buy it because you want an investment-grade asset that’s going to perform," he says.

"A lot of those new properties are not going to be investment-grade."

"We’ve found that investors have not been held back by this. They’re still very comfortable buying established flats and older style apartments. They’re buying in good locations where there’s a good land-to-asset ratio."