Recent changes to the way landlords are taxed prompted the Residential Landlords Association to describe the taxation of landlords in the UK as “one of the most hostile tax regimes in the western world”. But how well does that claim stand up to scrutiny?
Australia’s housing market suffers from many of the same problems as the UK market. Prices in major cities have risen to the extent that it’s virtually impossible for a first-time buyer on the average salary to buy a house. Yet investors there are treated very generously by the tax system. Australian landlords can deduct mortgage interest and other costs from their rental income, but they also have the option to “negatively gear” their property investment. This means they can make a loss and offset this against their other income, including that from employment.
When they sell, Australian investors receive a 50% reduction on the capital gains tax (CGT) payable, as long as they have owned the property for at least 12 months. The policy is in contrast to the UK, where people selling second homes pay a higher rate of CGT than investors disposing of other assets. Similar concessions also apply in New Zealand, where negative gearing is allowed and there’s no CGT at all for investment property unless it was purchased solely for resale.
Unsurprisingly, these concessions are often controversial, just as in the UK. “Governments are spending billions of dollars in tax subsidies for people who are already comfortably housed or investing, pushing up housing prices and debt to unprecedented levels,” says Cassandra Goldie, chief executive of the Australian Council of Social Services, an advocacy group.
Tax breaks for property investors in the United States aren’t quite so generous, but landlords can offset rental losses under certain circumstances. Rental income is considered “passive income”, and losses on rental properties can be offset against other forms of passive income, such as interest on cash, gains on stocks, or other capital gains. “With passive activity, you have to [declare] income and you are taxed on that income, but for losses you can only deduct losses to the extent you have passive income.
The non-deductible passive losses accumulate, however, and when you sell or otherwise dispose of the property, the accumulated losses can be taken at that time,” says Jim Adkinson of Florida-based accountants Adkinson CPA. Meanwhile, in Canada landlords can deduct interest expenses, mortgage fees and the cost of maintaining and managing rental properties from their rental income, but a net loss on a rental property cannot be deducted from overall income. They also benefit from a 50% CGT reduction when an investment property is sold.
Finally, in Germany, where most people are renters, landlords are also treated favourably, according to David Hannah of Cornerstone, a specialist tax adviser. “Germany allows landlords to deduct 100% of their mortgage interest from their property income, claim rental losses against their other income and deduct depreciation costs,” he says. “You are also not required to pay CGT at all on disposal of any property owned for more than ten years.”
So overall, landlords in the UK may have some reason to feel hard done by. But given the political climate, that’s unlikely to change soon. In MoneyWeek’s view, there’s probably more chance of further taxes and curbs directed at buy-to-let, rather than concessions. Landlords might be wise to plan accordingly, rather than looking enviously at their peers in the rest of the world.