For the best part of a century, Australian property investors have enjoyed a generous tax arrangement found in few other countries: the infamous “negative gearing”.

Now, sweeping reforms to limit negative gearing to new builds and also change the way capital gains are taxed have become law.

The federal government hopes to give first-home buyers a better shot at buying existing homes and at the same time redirect investor cash towards increasing housing supply.

However, some of the practical implications of these changes haven’t received much attention. Here are three possible side effects which could now distort the property market in unexpected ways – including favouring investors.

What is negative gearing?

Most people associate negative gearing with real estate. But it can apply to any kind of investment.

Here, gearing simply means borrowing money to invest. And if an investment is negatively geared, it means the expenses related to owning it (such as the interest payments on a mortgage) are greater than the income it generates (rental payments).

For property investors, these expenses could also include other costs, such as real estate agent fees, council and water rates, and so on.

Under the old rules, high income earners were able to use a rental loss immediately to reduce their tax bill on other income, such as a salary.

Coupled with the way capital gains were taxed at a 50% exemption, the arrangement allowed many property investors to tolerate........

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