Positive and Negative Gearing

The terms “positive” and “negative” gearing refer to the use of borrowed funds as a part of an investment strategy.

When you use finance to pay for a rental property, you add another cost to your monthly expenses. You will be expected to pay interest on the loan and your cash flow must be able to cover these costs, as well as the other expenses of owning a property, such as insurance and ongoing maintenance.

The difference between positive and negative gearing is that the former involves borrowing money to buy an investment property (for example, a house), then making monthly income payments to the bank as well as paying off the principal amount borrowed. In contrast, when you have negative gearing, your rental income covers your interest payments and loan repayments, with any extra income going towards paying off the principal amount.

Not all rental properties are negatively geared. A property is positively geared if the rent exceeds the costs of owning, including taxes and maintenance fees.

Both positive and negative gearing can be effective strategies, depending on your situation.

Negative gearing may allow you to reduce the tax you pay on your income from other sources, such as a regular wage or salary. However, to make this strategy work for you, you will need to be able to cover the shortfall between the costs of owning an investment property and the rent income you receive from it.

A positively geared property could add to your annual income. Remember, however, that you will need to pay tax on this additional income.

Negative gearing involves using the cost of a rental property to reduce your taxable income. It’s important to keep good records and written receipts of all property-related costs so that you have written evidence to support your tax claims at tax time.

Our team of experts can help you select the investment loan that will best meet your needs. Your tax professional can help you make the most of gearing to invest.