Reader question: My husband is German and I am Australian we are living and working in Australia, we would like to invest in a property in Germany and rent it out. Are the tax implications the same as investing in Australia? Would we be able to reduce our taxable income same as we would if having an investment property here, negative gearing?

As Australian residents you are required to pay tax on your worldwide income.  This includes declaring any rent received on a property in Germany in your Australian income tax return - even if it has been, or will be, taxed outside Australia.  If an ATO audit detects that you did not declare offshore income there will be penalties and potentially a jail sentence if it was found to be an ‘intentionally fraudulent act’.  If you have paid German tax on that income, you may be entitled to an Australian foreign income tax offset, which provides relief from double taxation.

The upside is that you can also claim the deductions - such as interest, repairs, depreciation, rates and insurance - for your foreign rental property.  If your overseas property tax deductions are greater than your overseas rental income, you will have a foreign income loss.  For many years, these foreign losses were quarantined and had to be carried forward to future years and only be offset against future foreign income.

However, many foreign property investors are not aware of the change in the rules a few years ago. Since 1 July 2008, foreign losses have not been quarantined from domestic income. This means that you can now ‘negatively gear’ your foreign income loss to reduce your Australian income.

Before you calculate your net income, all foreign income, deductions and foreign tax paid must be converted to Australian dollars. There are two ways of doing this. Depending on your circumstances, you can use:

• the exchange rates prevailing at specific times (generally used for specific transactions such as monthly rent, asset purchases and one-off expenses such as rates and insurance)
• an average exchange rate (generally used for expenses incurred over a period such as loan interest).

This article first appeared in the September 2012 issue of Your Investment Property Magazine www.yourinvestmentpropertymag.com.au. Copyright Key Media Pty Ltd 2012.