If there is one thing that separates the Australian housing market from most others, it’s the propensity for investors to leverage into buy-to-let properties in the face of negative income returns, in the expectation that capital appreciation will repay debt and interest.
‘Negative gearing’, as it is known in Australia, is a popular form of leveraged investment in which an investor borrows money to buy an asset, but the income generated by that asset does not cover the interest on the loan. By definition, a negative gearing strategy can only make a profit if the asset rises in value by enough to cover the shortfall between the income received and the costs incurred from the asset.
Australia’s negative gearing rules are unusual in that they allow investors in both property and shares to write-off the cost of borrowing used to acquire an asset, in addition to other holding costs, against all sources of income (including labour income), not just the income generated by the asset. There are also no limitations on the income of the taxpayer, on the size of losses, or the period over which losses can be deducted.
By contrast, in the United States, rental property expenses cannot be deducted against unrelated labour income, which effectively limits negative gearing to professional investors and developers.
In late April 2012, the ATO released its Taxation Statistics for the 2009-10 financial year (FY10). This report examines this data in detail, which shows that Australia remains a nation of loss-making landlords highly exposed to a property downturn.
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