Negative gearing is a constant source of debate, but how does the tax concession stack up to housing tax codes around the world?
When it comes to housing, Australia’s taxation system has generated its fair share of controversy. Negative gearing is a constant source of political debate and draws heated, and often hyperbolic, claims from both those wanting it abolished and those who claim its removal would have apocalyptic consequences. How does the contentious concession stack up to housing tax policy in other countries around the world?
While much is made of negative gearing, it’s not the only tax concession on housing. Perhaps even more important is the capital gains tax (CGT) discount on properties. Here’s what both of them actually amount to:
Negative gearing is the ability to claim a deduction on your personal income for any loss generated by a rental property you own. In short, if the net rental income after expenses are deducted is less than the interest on the loan securing the property, the property is negatively geared. At the end of the tax year, if you find the rental income generated by a property is less than the interest you paid on the property’s loan and the cost of maintaining the property, you can deduct this from your income, meaning your taxable income will be lower. It’s well suited to investors looking to eventually sell their property for a capital gain who want to offset their expenses in the short-term.
Capital gains tax concession
Australian property owners can also benefit from capital gains tax concessions. Owner-occupiers who have lived in a dwelling as their main place of residence are entirely exempt from CGT upon the sale of the home. Investors also benefit from CGT concessions. They’re given a 50% reduction in CGT if they have held the asset for more than a year. There are also other ways investors can avoid paying CGT.
Other tax concessions for housing
Australian property investors can claim a variety of deductions for their properties, even if they aren’t negatively geared. They can claim the costs of maintenance and repairs to the property, and can deduct the cost of improvements and capital works.
New Zealand is one of the only other countries with a negative gearing concession for property investors. New Zealand’s system is virtually identical to Australia’s, with investors able to claim an income deduction if the interest paid and cost of maintaining their property is greater than the rental income the property generates. On top of this, New Zealand has no capital gains tax for investment property unless it was purchased for resale.
Kiwis can also claim a number of other deductions on investment properties, even if they aren’t negatively geared. Some of these include:
- Repairs and maintenance
- Real estate agents’ fees and commission
- Council rates, land tax and strata fees
The United States isn’t quite so generous in its tax inducements to property investors. Investors can, however, deduct rental losses under certain circumstances. Because rental income is considered passive income, losses on rental properties can only be deducted from other forms of passive income such as gains on stocks, interest or other capital gains. Investors can deduct expenses such as depreciation, repair costs and operating expenses from their total rental income.
The U.S. tax system does grant some major concessions, however, to owner-occupiers. Owner-occupiers can deduct the interest paid on their mortgage from their income. There are a few stipulations. For instance, the deduction is limited to interest on the mortgages for the taxpayer’s primary place of residence or a second home, and the interest is only deductible on the first $1 million of debt.
American taxpayers also get the benefit of capital gains tax concessions for property sales. Home sellers are exempt from capital gains tax for gains of up to $250,000 for an individual or $500,000 for a married couple if the property was used as the primary place of residence for at least two of the five years preceding the date of sale.
Investors in Canada can deduct interest expenses from their rental income and can also deduct interest paid to tenants on rental deposits. In addition to this, they can deduct a variety of loan fees such as:
- Mortgage broker fees
- Mortgage guarantee fees
- Legal fees related to the mortgage
- Mortgage application and processing fees
- Appraisal fees
- Insurance fees
All these fees can be deducted over a period of five years.
In addition to this, Canadians can deduct a number of costs of maintaining their rental property, including:
- Advertising for renters
- Property manager fees
- Property repairs
- Property taxes
As with most other countries, this allows Canadians to deduct expenses from their rental income, but a net loss on their rental property cannot be deducted from their overall income. Canadians are also exempt from capital gains on the sale of their home if it’s their primary place of residence. Canada also offers a 50% CGT exemption for investment property, and does not have the requirement to have held the property for 12 months.
Property investors in the United Kingdom cannot transfer a loss from their rental income to offset income from other sources. Investors can, however, deduct a net loss from future profits by carrying the loss forward to a future year. They can also deduct a net loss from one property from the profits of other properties they might own. Also, like Canadians, U.K. investors can deduct the interest on their investment property home loan.
In addition to this, residents of the U.K. can deduct a range of expenses from their rental income, such as:
- Accountants’ fees
- Maintenance and repairs (excluding improvements)
- Council rates
- Property agent fees
Capital gains tax doesn’t have to be paid in the U.K. on the sale of the primary place of residence, but does have to be paid on the sale of investment properties.