What is negative and positive gearing?
You’ve probably come across the term ‘negative gearing’ in relation to property investing. But it can be confusing. So let’s take a look at what it means.
‘Gearing’ is simply a way to describe borrowing to invest. So if you take out a loan to buy a rental property, your investment is said to be geared.
Now in many cases, the costs of owning that property including rates, insurance, repairs and loan interest, add up to more than the annual rent earned, meaning the investor is left with a loss each year.
In this case, the property is ‘negatively geared’.
Many investors are comfortable with this situation because they believe the property will increase in value over time, leading to an overall gain when they sell it.
In addition, at tax time that annual loss can normally be offset against regular wage or salary income. This can reduce your total tax bill, potentially making a negatively geared property very tax-friendly.
But not all investment properties are negatively geared.
Some rental properties can generate annual rent that adds up to more than the costs of owning the place.
In this case, the property is said to be ‘positively geared’. It means your rental property provides regular, additional income – not just long term capital growth.
Instead of being able to claim a tax deduction, positively geared investors may need to put money aside for the tax applicable on this extra income.
Negative or positive gearing? There’s no single option that is best for everyone. It’s all about determining which investment strategy is in line with your goals.
Talk to your Mortgage Choice Yarra City financial adviser for a better idea of whether negative - or positive - gearing is the most suitable strategy for you.