How negative gearing can encourage investment in affordable housing

Negative gearing has had a pretty big run in the media lately. Politicians and economists are saying it’s responsible for a housing bubble, and many are calling for it to be scrapped. In case you’re not aware, negative gearing is when someone borrows money to invest, and the total income generated from the investment is less than the cost of owning and managing that investment. These these losses can then be claimed as a tax deduction against all of the investors income, not just that generated by the investment. It’s the interaction between negative gearing and capital gains tax exemptions that makes the housing market so attractive to investors. There’s no doubt this tax break can be used better and CHP recently made a submission to the Re:think Tax Review making a few suggestions as to how the tax system could be used to attract investment in affordable housing. 

For example, one solution offered by CHP involves alternative tax treatment for rental housing investment. At the moment the losses from an investment property can be claimed against someone’s entire income. CHP recommends limiting the losses claimed to the rental income, which would made the housing market less appealing as a tax shelter. However, if properties were rented to low income households where the rent was less than 30% of their income, landlords could claim a deduction on that encourage investors to rents to people on lower incomes.

Because Australia’s taxation arrangements favour home ownership, they simultaneously disadvantage people who will never own a home. In short, CHP recommends that:

  • The Commonwealth Government support states to phase out stamp duties and replace them with broad based land taxes
  • The deduction of losses for rental housing investment be quarantined to rental income
  • That the savings be used to establish incentives for institutional investment in affordable housing
  • Additional tax incentives be provided to housing investors that let properties to low income households at affordable rents be considered

You can read CHP’s full submission on the website.