Previously known as “The Property Planner, Buyer and Professor”
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Show Notes – Is Negative Gearing Worth It?
What is Negative Gearing?
Cate kicks off the conversation by asking Dave to explain negative gearing in simple terms.
Dave describes it as a situation where the rental income from a property is less than the expenses to hold it, meaning the investor runs at a loss.
This loss can then be claimed as a deduction against taxable income, lowering the investor’s annual tax bill. He illustrates the concept with an example of a $10,000 rental loss reducing taxable income from $150,000 to $140,000, resulting in a $3,700 tax refund.
What Expenses Are Deductible?
Mike outlines the various costs investors can claim as deductions.
These include interest on loans, council rates, insurance, advertising for tenants, property management fees, and maintenance. He also covers longer-term deductions like capital works and depreciation on assets such as appliances or carpets.
Borrowing costs, like loan application fees, can be deducted over five years or the life of the loan.
Is This Just a Property Loophole?
Cate raises a common criticism: that negative gearing unfairly benefits property investors.
Dave explains that negative gearing isn’t exclusive to property, it also applies to shares, businesses, and commercial investments.
He points to ATO data showing that most property investors are everyday Australians, not the ultra-wealthy. In fact, 71% of them own just one investment property.
Why Lose Money?
Cate asks the obvious question: why would anyone want to buy an asset that loses money?
Mike explains that many investors use negative gearing as a long-term strategy, betting on future capital growth and rising rents.
Over time, as rents increase and loan repayments stabilise or reduce, many properties become positively geared. Dave notes that this shift typically happens within 5 to 10 years, depending on the property and market conditions.
Common Mistakes and Misconceptions
Dave warns against investing for tax deductions alone.
He explains that many investors are lured into new builds with flashy depreciation benefits but poor long-term growth prospects.
Mike adds that high-yield properties in fringe or regional areas often come with limited growth potential and greater risk. Both emphasise that asset quality and long-term strategy matter far more than short-term tax savings.
Real-World Investor Data
Dave debunks the myth that property investors are wealthy elites.
He shares ATO figures showing that about 1 in 5 taxpayers owns an investment property, and 90% of those investors own just one or two properties.
These are largely middle-income Australians providing housing to a significant portion of the population, filling a gap the government cannot meet alone.
From Negative to Positive Gearing
The Trio discusses how many properties eventually become positively geared.
As rents rise and loans are paid down, income eventually exceeds expenses.
This typically takes several years, depending on the property’s rental yield, the interest rate environment, and local demand.
Dave explains how choosing a high-quality asset in the right location can accelerate this process.
Why Capital Growth Comes First
Cate, Dave and Mike agree: capital growth should be the priority.
While negative gearing provides a tax benefit, it’s only valuable if the underlying asset appreciates over time.
Dave cautions that chasing tax refunds without focusing on quality and location is a costly mistake. Tax deductions are a bonus, not the reason to invest.
Gold Nuggets
Mike Mortlock’s gold nugget: Mike considers the benefit of cashflow versus capital growth, and highlights that the best investors are the ones who are focused on long term capital growth.
David Johnston’s gold nugget: Investing requires long term thinking and investors are encouraged not to chase shortcuts. Understanding how the numbers change over time and utilising negative gearing as a tool is critical. But tax deductions are a benefit, not a reason to invest.
Cate Bakos’s gold nugget: A high land to asset ratio can go hand in hand with great capital growth. High tax depreciation opposes land to asset ratio though. There is a correlation!
Resources:
- Ep. #16: Unpacking land to asset ratio
- Ep. #58: Off the plan purchases – Everything you need to know. Part 1: purchase through to settlement
- Ep. #59: Off the plan purchases – Everything you need to know. Part 2: The financial drivers
- Ep. #87: Optimising tax deductions – top mortgage and loan strategy tips
- Ep. #250: Investment Borrowing Masterclass – Maximise Tax Deductions and Advanced Mortgage Strategies for Long-Term Wealth Creation
- Ep. #303: Avoiding Property Investment Traps – Off-the-Plan Risks, Market Timing & Spotting Property Spruikers
