As the 2016 federal election was underway, debate flared over the Australian Labor Party's policy to abolish negative gearing for residential property investments. It was touted as a well-meaning attempt to get a grip on the issue of housing affordability, fed to the masses as a means of stopping the rich using unjust tax loopholes to get richer on the back of working Australians. As the current federal parliament creeps closer to dissolution, the debate rages once again.

Some interesting pieces of data to get us started:

The ATO reports the existence of approximately 2.1 million property investors in the country. More than 90% of them own just one or two properties.
The ATO considers someone with $5 million in net assets a wealthy individual and someone with $30 million in net assets a high wealth individual.
The ABS estimates the mean price of residential dwellings in Australia to be $686,200.
A property investor with no other assets would therefore need to own at least seven average properties unencumbered to be classified a wealthy individual by the ATO.
Less than 0.07% of Australians hold seven or more properties.
The largest expense for most property investors is mortgage interest. Owning property outright makes negative gearing extremely unlikely.
The vast majority of people utilising negative gearing are not wealthy.

By using negative gearing in residential real estate, the investment property's outgoings (mortgage interest, agents fees, maintenance costs, depreciation, etc.) exceed the income (rent). This gap is offset against the investor's income which results in a lower taxable income, triggering a tax refund. Since higher-income individuals pay a higher rate of tax, lowering their taxable income inevitably results in a larger tax return.

Consider this example: If somebody earning $70,000 reduced their taxable income to $60,000, the ATO says they've paid $3,250 too much in tax. If somebody earning $200,000 reduced their assessable income to $190,000, the ATO says they've paid $4,500 too much in tax. This system is what gives weight to the association some people have with rich people and negative gearing.

Abolishing negative gearing would definitely be an inconvenience to Australians who both invest in residential real estate AND earn a high income... but what about the vast majority of Australian property investors whose portfolio suggest they're very far from wealthy individual status?

Although these individuals and families don't get as much from negative gearing as the top end of town, it has more of an impact on them. In other words, a $3,250 offset is more consequential to someone on $70,000 than a $4,500 offset is to someone on $200,000. Additionally, the lower your income, the higher your loan-to-value ratio and lenders mortgage insurance are likely to be, the less appealing you are to lenders and the higher your interest rate is likely to be. This makes acquiring an asset and holding it long-term more difficult.

The black and white of this story comes in here: If a wealthy individual falls short of a seven-strong property portfolio by one because of Labor's policy, they still have six investments in the game. If a middle-class individual falls short of a single-asset property portfolio by the same amount because of Labor's policy, they are not a property investor at all.

Whether you agree with abolishing negative gearing or not, one thing is certain: this policy of upward resentment actually tips the scales toward those who are still able to afford investment properties with very little evidence it will improve housing affordability.

...or in the wise words of Carl Jung:

What you resist not only persists, but will grow in size...