Rental Property Tax Deductions and Individual Investor Housing Demand

This paper provides evidence on how individual taxpayers respond to rental property tax incentives in a system where capital gains are taxed concessionally and rental losses are fully deductible against labour income. Using administrative tax return data from Australia and variation in marginal tax rates induced by mid-2000s reforms, I show that reductions in marginal rates significantly reduce the likelihood of holding an investment property with a negative net rental income position. My findings demonstrate how debt is used to generate tax losses and thereby shift income from the labour to capital gains tax base, providing new evidence on how leverage-based income shifting opportunities can shape rental investment behaviour and the composition of housing demand. The empirical results are consistent with a standard model, which I leverage to derive predictions for the effects of reforms to the tax treatment of rental deductions.