Positive Gearing, Negative Gearing & Investment Property
Investing in property is one of the most secure investments you can make for your future, but there’s more than one way to benefit financially from your property. Whether you positively or negatively gear your rental property, there are ways you make it work to your advantage. In this article, we look at the differences between positive and negative gearing, their benefits and how to take advantage of tax breaks and deductions.
Positive versus negative gearing
Gearing refers to the income you earn from your investment property through rent. This income can either be positively or negatively geared.
What is negative gearing?
Negative gearing happens when the income earned from your investment property through rent is less than the expenses associated with the property such as interest repayments, council rates and levies.
What is positive gearing?
Positive gearing occurs when the income earned through rent from your property is higher than your property-related costs.
What are the benefits of negative gearing?
The main benefit of negative gearing is taxable income reduction — you can offset your net rental losses against other income earned, such as wages and interest, effectively reducing your taxable income for the year. This means you can reduce the amount of tax you have to pay for that financial year.
What are the benefits of positive gearing?
One of the main benefits of having a positively geared rental property is improved cash flow. If you have a positively geared investment property, you’ll have an additional income stream which will allow you to not only pay off your mortgage but also leave extra money for other expenses such as bills, holidays and household expenses.
Additionally, you’ll be able to grow your savings and you may be able to invest some of the surplus from your rental yield into savings or stocks, growing your investment portfolio overall.
How to calculate if your property is positively or negatively geared
It’s fairly simple mathematics, if your net capital gain is in positive figures, your property is positively geared. If it’s negative, your property is negatively geared. The diagram below shows how to calculate your net capital gain or loss, which will indicate whether your property is positively or negatively geared and provide the amount of money you can use to offset your income (if your property is negatively geared).
Tax deductions: negative gearing tax benefits and deductible rental property expenses
If the income from your investment property through rent delivers a net negative profit, you can claim that loss as a deduction against your annual income through negative gearing.
Additionally, in Australia, there are a number of rental expenses which can be claimed as tax deductions beyond your net rental loss including:
- Immediate deductions incurred in the previous tax year including advertising for tenants, insurance, legal expenses, pest control and more.
- Borrowing expenses such as loan establishment and lender title search fees, mortgage documentation costs and lenders mortgage insurance.
- Depreciating assets including plant and equipment and capital works.
It’s important to note that these deductions can only be claimed if your investment property is available to rent.
How does depreciation impact negative gearing?
Depreciation of your rental property can be included when calculating the net profit or loss. If your property is negatively geared, the more deductions you can claim, the higher your income offset will be and the less tax you’ll be required to pay.
Which is better, positive or negative gearing?
It depends on your personal financial situation. There is no cut and dry rule about which gearing strategy is more profitable in the long run. If cash flow is a priority you may choose to positively gear your property to ensure a steady income stream from your rental property. It’s always best to consult with a professional financial advisor or investment property consultant before entering the investment property market or for advice on your current portfolio.
How can I get a start in the investment property market?
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