Negative gearing Redux

Should the interest paid by landlords on loans used to finance the purchase of rented houses and apartments be tax deductible? There is widespread agreement that interest payments should be deductible at least up to the amount of the landlord�s �net rent� � meaning the actual rent, minus all expenses other than interest payments. In this paper, we revisit Australia�s controversial �negative gearing� (NG) arrangements, under which investors can also deduct negative cash flows � defined as the excess of interest payments over earnings net of depreciation and other non-interest expenses � from their other taxable income. We focus on NG of investments in rental housing, but the principles apply also to other investments, such as equities and bonds.