Property Investment and “Negative Gearing” in Australia

June 17, 2015

Australia is in the grips of a long running debate over the tax treatment of "negative gearing”. Negative gearing is a situation when one borrows money to invest and the return on that investment is less than the borrowing and other costs. In Australia, your loss from negatively geared property for a given year is deductible.

Imagine you borrow money from a bank to buy a property, which you then rent out to tenants. In the early years of your investment, the holding cost on the property – interest payment, maintenance costs, depreciation, etc. – turns out to be greater than the returns from rent. This difference can be deducted against other income you earn from other sources.

The Australian Greens want this to end. The party has proposed the elimination of negative gearing deductions. As Greens Senator Scott Ludlam explained:

“I don’t think it’s fair that low and middle income taxpayers should be subsidizing property investors and that’s really at the heart of why we’re making this proposal.”

Writing off losses as deductions is not a government subsidy, nor is it a special tax treatment designed to benefit the rich. Deductions for negative gearing allow investors to properly define their profits and losses through the tax code.

It takes years for some property investments to rise in value, and sometimes property owners simply can’t find interested tenants. Fluctuating income streams is just the nature of the business. The current Australian tax code ensures that investors are able to account for losses. The deduction makes sure that tax is imposed on average profitability of the investment over its life.

The U.S. tax code has a similar provisions for handling losses for businesses. Under U.S. tax law, businesses that experience losses can deduct these losses against either past or future profits. These provisions are typically called net operating loss (NOL) carryback and carryforwards.

In the past, we have emphasized the importance of such deductions.

“Net operating loss deductions are important because many businesses operate in industries that fluctuate greatly with the business cycle. They might have really fantastic profits one year, but then be in the hole next year. NOL carryforward and carrybacks help those businesses to smooth their income, so that the tax code is more neutral with respect to time.”

The only difference between NOL carryforward and carrybacks and negative gearing is that NOLs allow businesses to deduct losses against past tax returns (for carrybacks) and future tax returns (for carryforwards), whereas negative gearing allow Australians to deduct losses from other income in the same year.

There are deductions in tax codes that are loopholes and subsidies, but many are not. Negative gearing deductions in Australia are among tax deductions that properly define income and should be part of the tax code.

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