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The Truth About Negative Gearing: Who It Helps (and Who It Doesn’t) · The Follio Property Podcast

• 0:00
  I guess in plain terms, what is negative gearing? So, I mean, the simple answer is negative gearing is the ability to claim for the losses that you make in holding and renting out an investment property. So it's the ATO's way of saying you're providing an asset, you've bought an asset in order to make a return. It's not yet making a return. The cost of running it is losing you money. So we'll allow you to offset that loss against your other income.
• 0:27
  It's a beautiful advantage, right? It's the government essentially paying you to hold property. Correct. Which is very unique and I can see why it comes with so much stigma but so much noise when it goes through the election because it's arguably favouring those with property, bigger portfolios, arguably slightly in better situations. And it's creating, I guess, the gap between those trying to get into the market and those who are already in the market because essentially incentivising higher income earners to continue to play in the property space.
• 0:57
  It is. And it's- Not that I want to get political. There's two sides of the fence. And the hardest thing to know is what the outcomes would be if it wasn't allowed. So no one goes into business to lose money. So if negative gearing wasn't there and I knew I was going to lose money without any benefit to help me pay for it, would I buy property assets?
• 1:17
  Would I only do so if they were cheap or paying higher rents? In which case, if they were too cheap, builders wouldn't get to build any properties. If the rents were too high, there wouldn't be any housing available for people to rent. So what would the cause and effect be if there was no negative gearing? We don't know.
• 1:34
  Yeah, and that's it, right? There's a huge problem, housing shortage, not enough rental properties in the country as there is. If you were to remove that, it takes away a huge incentive, which could lead to- They would address different markets. So all of a sudden, people would only buy commercial property because it's not going to be negatively geared or their returns will be higher quicker. So how do you see in your world, in the tax world, where this is taken full advantage in terms of building out a portfolio? Where do you typically see it take shape in a portfolio?
• 2:04
  Well, it's really important because you don't want to lose money. So if you're getting a negative gearing benefit, you would prefer it to be through the likes of depreciation and things like that, which we can touch on a little bit further. The dream is to buy assets that are neutral or positively geared as quick as possible because they're going to give you more servicing to buy more assets.
• 2:26
  So where does negative gearing fit within a portfolio? So negative gearing fits where you've already got very high incomes. So you might go through a spike window where your business or your profession is going through a high pay cycle and you're getting a lot of additional revenue that you might not see coming for the next 10 years. And so instead of buying high income yielding assets, you might buy some development style assets that are more land banked.
• 2:52
  that at the time in the market, we may think are going to appreciate faster than those other ones, and you can afford to carry the extra expense. So you might buy some of those, you might eventually develop one or two, or you might just simply sell because of the uplift when your servicing drops back down to more normalised levels.
• 3:11
  because you've got no need for the additional income. Where you do have the need for the additional income, the bias has got to be assets that are going to generate good steady yields. So newer properties typically have less maintenance costs. They're more attractive to a tenant because they are newer. So they will pay you a higher rent, even if the property itself is inferior.
• 3:35
  Because the problem is we typically drive negative geared strategies because when you look at what appreciates in value, it's a land component of the property, right? So getting higher land value assets typically means or does mean you have lower improvement value. Therefore, the rental return is going to be less, but the capital gain in terms of the appreciation is likely to be higher.
• 3:56
  So what does that mean in summary? It means we buy negatively geared properties because we get greater capital growth. Yes. So that is the offset of that argument, right? And that's exactly right. If you're going through a window where you can afford losing money,
• 4:08
  but you're getting or expecting a larger capital gain out of it because capital gains is only 50% tax and the negative gearing is 100% reduction of your taxable income, you're getting an arbitrage of that outcome, even if it just replaces what it costs you when you do sell it. So obviously we're hoping that it gets more than that. So put that into reality on live example.
• 4:31
  So if we held a property for five years and it lost us $100,000 over that five years- In interest? In interest and maintenance and running costs and upkeep, and I was at the highest marginal rate, I would have saved $48,000 in tax. So now that $100,000 has really only cost me $52,000. If I then get $100,000 capital gain when I sell it, hopefully we get a lot more, but if I only got the $100,000, I only pay tax on $50,000 because I get the 50% discount,
• 4:58
  And at the highest marginal rate, that's only 25. So I've made 27 grand in just that arbitrage. There you go. So it's using your tax to your advantage in that? Correct. It's kind of reducing your risks by knowing what levers you can pull to do the asset that you want to buy. I'm kind of reading between the lines there, but it definitely seems more of a benefit than a strategy. It's, yeah, we definitely don't want to go into an asset class that's going to lose us money, but it helps complement getting into the right asset class.
• 5:28
  And it comes down, like I said, this whole podcast is built around how to build out a portfolio. And depending on the scenario, the situation of the client will depend on which strategy we recommend. And often it's a blend, right, where you're going to have high land value assets complemented with higher cash flow assets to get your diversification, but also to benefit from these tax sort of environments that we've discussed.