The debate over the removal of indexation and reduction of LTCG on real estate and gold has been more emotional than factual. The reductionist argument is that we pay taxes where we are making inflation-adjusted losses. This is definitely true. But the larger truth must interest us more.
The larger truth is that our realty investments are often actually awful. We must prioritize improving the quality of our investments. With indexation gone, we don’t have the government covering up our mistakes by doling out tax losses. This only means we must make real estate decisions which will last longer compound long and fast enough to beat inflation significantly and deliver enough returns to make the tax negligible relative to returns. Our property investments must at least satisfy one of the above three criteria.
This is not something new. A few decades ago, when indexation on equity investments was abolished we had the same requirement. Going by our equity track record, there is every reason to believe our investment quality in real estate will improve over the coming years.
Taxes should not be the fundamental reason for purchasing a home. In fact, taxes must not overly influence asset choices. The investment merits, asset allocation needs, and return potential must drive investment decisions. The focus must be on making winning decisions. Indexation in real estate protected losing decisions with a government subsidy. In the process, it removed the fear of making a bad decision from the investor’s mind. Investors will not have that privilege anymore.
But it is not a loss of privilege to grudge about. It should make investors think harder through decision-making. It should lead to winning decisions and a high strike rate for success in real estate. The experience which the removal of indexation for listed equities gave us should be the guiding light. We need to introspect on our journey with listed equities post-elimination of indexation. We have all the leading learnings hidden in that experience. We should achieve more and decisively beat inflation in our investing across asset classes individually and collectively. When we beat inflation decisively who wouldn’t prefer the lower tax rates?
The onus is on us not to let ourselves become losers.