“Someone explain positive and negative gearing in simple language, please!”
Negative and positive gearing.
You’ve heard of it.
You know it exists.
But you are really not quite sure what exactly it is.
Or which is better.
Well, strap in, by the end of this blog, you will be 100% confident about the difference between negative and positive gearing, and which option is the best for your investment.
Positive and negative gearing is applicable to a range of investments. However, for the sake of this article, we are specifically referring to positively and negatively geared properties only.
Australians love investing in property. In fact, to be precise, 30% of Aussies own an investment property. Negatively geared properties are more common in Australia with 40% being positively or neutrally geared with the remaining 60%, negatively geared. (Source: ATO)
So let’s break down the difference between the two.
Negatively geared property
A negatively geared property is one where the cost of your investment (for expenses such as loan interest, rates, insurance, maintenance and property management fees), is greater than the income generated from rental income. It means every month, you are contributing funds out of your own pocket to cover your expenses.
Why choose a negatively geared property?
An investor takes on a negatively geared property with the aim of capital growth. That the value of the property will increase over time and the cash shortfall will be made up in the future (ie when the property is sold).
Tax implications of negative gearing
Investors can claim their investment losses (expenses) as a tax deduction, therefore reducing your taxable income.
Positively geared property
A positively geared property is one where the income generated from the rental income is higher than the combined cost of your expenses.
Why choose a positively geared property?
Those with a positively geared property can use the extra funds to pay down their existing mortgage, or investment mortgage, to invest again or use for other purposes.
Tax implications of positive gearing
With a positively geared property, investors may need to pay tax on the additional income earned.
So which is best for your situation?
Many factors come into play when deciding on what type of investment property will best suit your needs. You will need to consider your risk profile – how much are you willing to invest in an unknown? If you are undertaking a negatively geared property, you are taking the punt for future capital growth in the area you invest in.
Can you afford to top up your investment expenses on your current salary?
Can you service the additional expenses with any increase to investor interest rates?
A qualified financial planner can help you to assess your situation and make the best decision based on your financial position and risk appetite.