The pros and cons of negative and positive gearing

You may think property investment is a ‘set and forget’ strategy. But there’s a lot more to it than just sitting back and waiting for all that sweet capital growth to rain down on your bottom line.

Investment properties generate income, but they also come with costs - and these two combined will have a significant impact on your tax position. So, how do you know what strategy will suit your unique position best? That’s where gearing comes in.

What is gearing?

The Property Mentors CEO Luke Harris is well aware that there’s a lot of confusion about what gearing is, how it works, who it benefits and why.

“Just like operating a business, or investing in shares, property investing is a taxable activity.”

Luke Harris

“Therefore any income generated (or losses made) with respect to that activity impacts your income position and the amount of tax you will be liable to pay,” he adds.

Put simply, the word ‘gearing’ means borrowing money to help you buy a property, and how that affects your cash flow, or your cash position, after expenses.

A positively geared property means the rental income will cover all of the associated outgoing cash costs, such as interest, council rates, body corporate levies and property management fees.

On the flip side, a negatively geared property is when the rental income does not cover all of those outgoing cash costs. That is, it makes a loss – and this loss reduces your overall tax liability.

Which strategy should property investors choose?

Mr Harris said it’s important to remember that it’s not the property that determines whether an investment is negative or positive, it’s the way that the ownership is structured.

“For example, it could be in your own name, through a company, a trust or self-managed superannuation fund (SMSF),” he said. “It's the resulting tax position and the way you choose to finance the property that determines the final outcome.”

Like any investment strategy, gearing needs to suit your unique situation.

For example, negative gearing may allow you to your overall tax bill. However, you’ll also need to be able to cover the shortfall between the rental income and outgoing costs.

And while a positively geared property could add to your overall income, you’ll have to pay tax on that extra money.

How The Property Mentors can help

Here at The Property Mentors, we’re active professional property investors ourselves, so we know first-hand how to help you make the most of gearing to invest. Contact us and we’d be happy to discuss how our suite of strategies can fit your individual circumstances.

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