If They Scrap Negative Gearing, the Rich Won't Notice. You Will.

Property tax loopholes are back in the headlines. Every election cycle, some politician discovers that negative gearing costs the federal budget $10.9 billion a year and decides it's the answer to housing affordability 1.

The argument goes like this: rich property investors are claiming massive tax deductions, ordinary Australians can't afford to buy, therefore scrapping negative gearing will level the playing field.

It sounds reasonable. It's also almost entirely wrong.

I've spent the last three months pulling apart the ATO's taxation statistics, analysing who actually claims negative gearing deductions, and modelling what happens if the policy gets changed. The data is uncomfortable for both sides of the debate — but it's particularly bad news for the teachers, nurses, and tradies who make up the majority of negative gearing claimants.

Who actually claims negative gearing?

This is where the narrative falls apart.

According to the ATO's 2023-24 taxation statistics, approximately 67% of individuals claiming negative gearing deductions earn under $100,000 per year 2. These aren't the "wealthy fat cats" that housing affordability advocates rail against. They're middle-income Australians — a teacher on $85,000 who bought one investment property, a tradie on $95,000 trying to build a retirement asset, a nurse working overtime to service a $700,000 mortgage on a house in the outer suburbs.

The average number of investment properties held by negatively geared investors? 1.3 3. Not ten. Not fifty. One point three.

The tax deduction they claim averages around $4,000-$6,000 per year. That's the difference between their rental income and their holding costs (interest, rates, insurance, maintenance). For someone on the 37% marginal rate earning $90,000, that $5,000 deduction saves them $1,850 in tax. Not life-changing money. But meaningful for a family managing a mortgage and rising living costs.

Scrap negative gearing, and that $1,850 disappears. The property is still losing money — the holding costs still exceed the rental income — but now the investor wears the full loss with no tax offset.

"When someone tells you scrapping negative gearing hits the rich, ask them to define rich," says Yan Zhu. "Because the data says it overwhelmingly hits people earning $60,000-$100,000 with one or two properties. That's not rich. That's the middle class trying to build wealth."

What wealthy investors actually do

Here's the part that makes the whole debate somewhat pointless.

Truly wealthy property investors — the ones with ten, twenty, fifty properties — don't use negative gearing in their personal names. They hold their properties through family trusts and company structures.

Inside a trust or company, losses from negatively geared properties don't flow through to the individual's tax return. They accumulate within the entity. When the property is eventually sold at a profit, those accumulated losses are offset against the capital gain, reducing the tax bill dramatically 4.

The outcome is almost identical to negative gearing in economic terms — it's just structured differently and delayed. The wealthy investor still gets their tax benefit. It just arrives at sale time instead of annually.

If negative gearing for individuals is abolished tomorrow, here's what happens:

• Wealthy investors with trust structures: no material change. They restructure slightly and carry on. The accumulated losses strategy is already how most operate.
• Middle-income investors with one property in personal names: they lose $1,500-$3,000 in annual tax relief immediately, making an already cash-flow-negative investment more painful to hold.

The reform hits the people it claims to protect and bypasses the people it claims to target. That's not progressive policy. That's a misfire.

The timing couldn't be worse

Consider the broader context.

In 2022-23, profits from investor-owned rentals plummeted 73% due to higher interest rates 5. Many everyday investors are already barely hanging on. Their rental income covers 60-70% of their holding costs. Negative gearing — that annual tax offset of $1,500-$3,000 — is the difference between holding and selling.

Remove it, and forced selling begins. Not from the wealthy (who are insulated by their structures), but from middle-income investors who can't absorb the additional hit. They sell. Rental supply drops. Rents rise further. The housing affordability problem that negative gearing reform was supposed to fix actually worsens.

We saw a preview of this dynamic in Victoria after the 2023-24 land tax changes. The threshold dropped to $50,000, hitting virtually every investment property in metro Melbourne. Small-scale investors began selling. Rental listings dropped. Vacancy rates tightened further. The investors who exited were disproportionately the ones holding affordable properties in the outer suburbs — exactly the stock that first-home buyers and renters need most.

The pattern is consistent: when you increase the cost of holding investment property, the marginal investors exit first. And the marginal investors are the ones providing the affordable end of the rental market.

What the maths actually says about housing affordability

Let's test the central claim: would scrapping negative gearing make housing more affordable?

The Grattan Institute modelled this in 2016 and estimated house prices would fall by 1-2% in the short term if negative gearing were limited to new construction only 6. One to two per cent. On an $800,000 house, that's $8,000-$16,000.

Meanwhile, Melbourne house prices rose approximately $60,000 in the 12 months to June 2024 7. The "price reduction" from scrapping negative gearing would be recouped by natural price growth in roughly three months.

The fundamental driver of housing unaffordability isn't tax policy. It's supply. Australia needs approximately 240,000 new dwellings per year to keep pace with population growth. We're building about 170,000 8. That 70,000-dwelling annual shortfall compounds every year. No tax reform addresses this gap. Only building more houses does.

And here's the irony: negative gearing actually incentivises the construction of new rental housing. An investor who buys an existing property and claims negative gearing is adding to the rental supply pool. Remove the incentive, remove the investor, remove the rental stock. The tenant who was renting that property now competes with everyone else for a shrinking pool.

I'm not defending negative gearing as perfect policy. It has distortive effects. It does channel investment toward existing housing over new construction. A more targeted version — limited to new builds, or capped at a deduction ceiling — would be better designed.

But the binary "scrap it entirely" argument ignores the second-order effects that actually determine housing affordability. And those effects hurt the people at the bottom of the ladder hardest.

What property investors should do right now

Regardless of where policy lands, here's how to position yourself.

First, understand your holding structure. If your investment properties are in personal names and you're relying on negative gearing deductions, you have policy risk. Consider whether a family trust makes sense for your next acquisition — the accumulated losses strategy is more resilient to policy changes. Our recommendation: the first two to three properties go in personal names to maximise the low land tax threshold; from property three onwards, consider a trust for asset protection and distribution flexibility 4.

Second, focus on properties that don't need negative gearing. Our entire investment philosophy centres on positive or neutral cash flow. If your property generates enough rent to cover (or nearly cover) its holding costs, the loss of negative gearing barely affects you. A house in Hampton Park bought for $700,000 and rented at $550/week after renovation is close to cash-flow neutral at current rates. When rates drop — even by 0.5% — it's positive. No negative gearing required.

Third, don't panic sell. Policy reform takes years to implement, and grandfather clauses typically protect existing holdings. The 2019 Labor platform grandfathered existing negatively geared properties. Any future reform is likely to do the same.

The wealthy always find ways around tax changes. That's not cynicism — it's maths. Structure your portfolio so you're playing the same game they are.