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Negative and positive gearing explained

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Positive vs negative gearing: which is better?

One of the most common questions investors ask is whether to negatively or positively gear an investment property. 

The main difference between the two options is how it affects your taxable income. The right investment decision for any property investor will depend on their individual financial situation and goals. 

So what's the difference? 

What is Negative Gearing?

Negative gearing means that the cost of owning an investment property outweighs the rental income it generates. Although you are making a loss, these losses are tax deductible and result in tax savings overall. 

As an example, let's assume that your rental property earns $20,000 in one year and the expenses of owning the property (loan repayments, body corporate fees, maintenance, etc.) are $25,000. You will have a loss of $5,000 which you can claim as a tax deduction.

The biggest benefit of a negatively-geared property is the ability to claim tax deductions and reduce your taxable income. 

Additionally, a negatively geared property investment may appreciate in value over time. This capital gain in the value of the home can offset your other losses. 

There is also a risk involved with negative gearing because you are losing money. You will always need to budget for an ongoing shortfall and prepare for the losses.

Benefits of negative gearing 

  • Able to claim losses on the asset such as borrowing costs, building depreciation, and property expenses on tax to reduce your taxable income overall 

  • Capital growth can outweigh losses 

Downsides of negative gearing 

  • Requires strong enough cash flow to cover losses 

  • Likely to have an annual cash shortfall until tax time when you can claim on tax

  • Depending on how highly geared your investment properties are you can be at risk of rising interest rates 

What is Positive Gearing?

Positive gearing occurs when the property is receiving more rental income from tenants than it costs to own and fund the property. This means you can profit from the investment from day one. 

As an example, let's say that your investment property is earning $20,000 a year from rent, and your expenses (loan repayments, body corporate fees, maintenance, etc.) are only $15,000. You'll have positive annual cash-flow of $5,000.

Obviously, the benefit of a positively geared property is the income. You don't need to shell out any money from your salary for the expenses, and you can put your money elsewhere.

You're earning money from positive gearing, so this means you will pay more tax. The higher the income you generate, the higher your tax obligations will be.

However, many positively geared properties are located in outer or regional areas, so your property may experience slower capital growth.

Benefits of positive gearing 

  • The investment property will be generating rental income, which means you can save money towards a deposit for another property or pay off your existing mortgage repayments 

  • In comparison to negative gearing, a positively geared property portfolio reduces your overall debt 

  • Additional income can increase your borrowing capacity

Downsides of positive gearing 

  • Bigger tax obligations as you will be earning extra income 

  • Can require long-term tenants to maximise the benefits 

  • Potentially slower capital growth 

Negative gearing vs positive gearing

To clearly understand the difference between negative gearing and positive gearing, the key differences have been highlighted in the table below.

Positive gearing Negative gearing
You’re making an ongoing net profit on the rental property You’re making an ongoing net loss on the rental property - which can be offset against your taxable income
You have an extra cash flow which could go towards making extra repayments, renovations, savings, into an offset account, or even be used to buy another investment property You need to have extra cash available to cover the net loss you’re making on the property
You may need to pay tax on your investment property's earnings The net loss you’ve made could allow you to claim a tax deduction on your other income (e.g. if you made a net loss of $10,000 on the property and earn $80,000 per year, you may only need to pay tax on $70,000)
The property is generating rental income and capital gains The property is solely generating capital gains

Which strategy is right for you? 

The right investment strategy will depend on your individual circumstances and what financial goals you want to achieve. For example, some investors choose to have a portfolio with both negative and positive geared properties. 

Your investment strategies should be aligned to your personal circumstances and risk preferences, and you should consider consulting with a financial adviser before purchasing an investment property.

Be sure to have a good understanding of the effects of gearing before you speak to a lender. 

You can check out our investment property loan products and see which one will be perfect for you so you can start investing today.

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About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.