Positive and negative gearing
Gearing simply means borrowing to invest.
Using finance to pay for your rental property can add to your costs. You’ll be expected to pay loan interest charges, and your cash flow needs to be able to handle this expense – even if the property is vacant, something that can happen from time to time.
The term ‘negative gearing’ refers to the situation when the ongoing costs of owning a property add up to more than the rental income it generates. Put simply, the property dishes up a loss each year.
Not all investment properties are negatively geared. If a property earns an annual profit, in other words, the rent outweighs the ongoing costs, it is said to be ‘positively geared’.
The distinction between the two matters because the annual losses of a rental property can usually be claimed on tax. This can trim the tax paid on other types of income such as regular wage or salary.
On the flipside, a positively geared property can add to an investor’s annual income.
As an investor, it’s worth knowing how to use negative gearing to your advantage. Maintaining good records and written receipts of all property-related costs is a sensible starting point. This way you’ll have written evidence to back up your claims at tax time.
We can help you select the investment loan that’s right for your needs, and your tax professional can help you make the most of gearing to invest.
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