Positive versus negative gearing
When most people think of investing, the first thing that comes to mind is making money. However, when it comes to property investment, there may actually be benefits to making a loss.
Blogger: Peter Gianoli, general manager, Investor Assist
Sound confusing? Let me explain...
What is a positively geared investment property?
When you borrow money to invest it is referred to as ‘gearing.’ An investment is positively geared if the income it generates is greater than the costs to run the property (repayments, interest, maintenance, fees etc.). So in simple terms, the property is paying for itself.
Pros include:
- More money in your pocket — the extra money you receive can be a handy extra income stream, especially if you have a few positively geared properties.
- Less risky — if you lose your job or your income situation changes then you won’t have to worry about supporting your investment property’s home loan.
Cons include:
- Tax time — as any profit you make from the property is classified as income, it will be taxable.
- Changing market — the perfect environment for a positively geared property is when rents are high and interest rates low. However if one, or both, of these conditions change you may be faced with a loss — which may not be part of your strategy.
What is a negatively geared investment property?
A property is deemed negatively geared when the expenses involved with the property are more than the rental income.
Pros include:
- It’s a tax deduction — any loss you incur may be offset against your taxable income.
- Lower rents equal more tenant options — lowering your rent to keep the property negatively geared may mean more clients will be interested and any current ones are less likely to look elsewhere, potentially saving you against the costs you would need to incur if your home was ever vacated.
Cons include:
- A loss is a loss — although the loss is softened by a tax deduction you still need to fork out the deficit in the meantime to cover the difference. This may be made a lot tougher if your financial situation changes.
- May hurt your borrowing capacity — having a negatively geared property sucking away at your cash flow may make it difficult to grow your portfolio, as it decreases the limit of what you can afford.
It is important whenever you are considering purchasing an investment property to make sure that you have a comprehensive understanding of your options, and personal situation. Therefore I always recommend you seek the advice of a Tax Agent before taking the plunge into property investment. You can also find out more information about positive and negative gearing on the ATO website.
