Negative gearing

Negative gearing can be a tax-effective strategy in Australia, because the tax system has a single income tax schedule for income from all sources. This means that for taxation purposes net investment income losses can be offset against other types of income, such as wage or business income, with only a few limits or restrictions.[3]

Negative gearing continues to be a controversial political issue in Australia and was a major issue during the 2016 Australian federal election and the 2019 Australian federal election, during which the Australian Labor Party proposed to eliminate the tax-deductibility of negative gearing losses against non-investment income (with some exceptions), and to halve the capital gains tax discount to 25%.[4] Analysis found that negative gearing in Australia provides a greater benefit to wealthier Australians than the less wealthy.[5]

Federal Treasurer at the time, Scott Morrison, in defence of negative gearing, cited tax data that showed that numerous middle income groups (he mentioned teachers, nurses, and electricians) benefit in larger numbers from negative gearing than finance managers.[3]

While allowing for negative gearing in its basic form, the United Kingdom does not allow the transfer of one type of income (or loss) to another type of income. This is due to its schedular system of taxation. In this type of taxation system, the tax paid is dependent on income source. Therefore, an individual who received an income from labour and from land would pay two separate tax rates for the two relevant income sources.

Between 1997 and 2007, the Tax Law Rewrite Project changed this system by simplifying the schedules. As with the previous system, people would not be allowed to transfer incomes (or losses).

A UK government online resource on renting out property in England and Wales[6] outlines how to offset losses. It states that losses can be offset against "future profits by carrying it forward to a later year" or against "profits from other properties (if you have them)".

New Zealand allows negative gearing and the transfer of losses to other income streams, with some restrictions.[7]

The Rental Income Guide[8] states a loss can only be deducted against other incomes if the rental income is at market rate.

The Opposition Labour Party attempted to raise negative gearing in the 2011 election, but after their failure to win government the issue reduced in significance.[9]

New Zealand now has ring-fencing rules, abolishing negative gearing in the residential property market. Residential property deductions can only be made against residential property income and cannot be deducted from income from other sources, e.g. wages.[10]

In principle, Canada does not allow the transfer of income streams. However, the most current Canadian tax form indicates this can occur in some circumstances.[11] According to "Line 221 - Carrying charges and interest expenses", interest payments from an investment designed to generate an income can be deducted:

Claim the following carrying charges and interest you paid to earn income from investments: [...] Most interest you pay on money you borrow for investment purposes, but generally only if you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid.[12]

Other sources indicate the deduction must be reasonable and that people should contact the Canada Revenue Agency for more information. The "Rental Income Includes Form T776"[13] states people can deduce rental losses from other sources of income: "You have a rental loss if your rental expenses are more than your gross rental income. If you incur the expenses to earn income, you can deduct your rental loss against your other sources of income." However, there is a caveat: the rental loss must be reasonable. What is reasonable is not defined in the "Rental Income Includes Form T776" Guide.

Based on these sources, claiming rental losses against other incomes in a given year is allowed as long as a profit is made over the life of the investment, excluding the effects of capital gains.

Canada has a Federal and Provincial income tax, and the above only relates to Federal income tax.

In principle, the US federal tax does not allow the transfer of income streams.[14] In general, taxpayers can only deduct expenses of renting property from their rental income, as renting property out is usually considered a passive activity. However, if renters are considered to have actively participated in the activities, they can claim deductions from rental losses against their other "nonpassive income".[15] A definition of "active participation" is outlined in the "Reporting Rental Income, Expenses, and Losses" guide:[15]

You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions.

It is possible to deduct any loss against other incomes, depending on a range of factors.[16]

Japan allows tax payers to offset rental losses against other income.[17]

Individuals can claim losses against rental loss with minimal restrictions,[18] but if the property was owned through a partnership or trust there are restrictions.[19]

There are a number of additional rules, such as restricting claims of losses due to Bad Debt. Additional information can be found in the Japan Tax Site.[20]

The German tax system is complex, but within the bounds of standard federal income tax, Germany does not allow the transfer of income. Rental losses can only be offset against rental income.[21] As stated on the Global Property Guide site, "Owners can deduct any expenses from the gross receipts, which were incurred to produce, maintain and safeguard that income."[21]

Germany recognizes seven sources of income:[22]

1. Agriculture and forestry
2. Trade and business
3. Independent personal services
4. Employment
5. Capital investment
6. Rents and royalties
7. "other income", as specified and strictly limited by law to certain types of income such as income from private transactions and income of a recurring nature (e.g. pensions)

The income from each of these sources is calculated separately.

Rental income is taxed as income and is subject to the progressive tax rate. Interest on loans provided to finance real estate, expenses, and property-related cost (e.g., management fees, insurance) can be deducted from the taxable rental income.[23]

In principle, the Dutch tax system does not allow the transfer of income. Most citizens calculate tax, separately, in 3 income groups:[24]

1. Box 1 income includes income from employment and income from the primary residence
2. Box 2 income, which includes income from a substantial holding in a company, as well as gains from substantial shareholdings
3. Box 3 deals with income from savings and investments

Dutch resident and non-resident companies and partnerships owning Dutch property are in principle allowed to deduct interest expenses on loans from banks or affiliated companies, and property-related costs from their taxable income.[25]