What positive and negative gearing mean for your investment strategy
Gearing simply means borrowing to invest.
Using finance to pay for your rental property adds to your costs. You’ll be expected to pay interest and your cash flow needs to be able to handle this expense, on top of the other expenses of owning a property, such as insurance and ongoing maintenance.
Negative gearing is when the ongoing costs of owning a property add up to more than the rental income it generates. Put simply, the property produces a loss each year.
Not all investment properties are negatively geared. A property is positively geared if it earns an annual profit. That is, the rent outweighs the ongoing costs.
Depending on your situation, both positive and negative gearing are strategies that could work for you.
Negative gearing in investment property may allow you to reduce the tax you pay on other income such as your regular wage or salary as the annual loss made on your rental property could reduce your overall taxable income. However, with negative gearing you need to be able to cover the shortfall between the costs of owning the property and the income you are receiving from it.
On the flipside, a positively geared property could add to your annual income. Remember, however, that you will need to pay tax on this additional income.
It’s also important to know how to use negative gearing to your advantage. Maintaining good records and written receipts of all property-related costs is a good start. This way you’ll have written evidence to support your claims at tax time.
We can help you select the investment loan that’s right for your needs. Your tax professional can help you make the most of gearing to invest.