Positive and Negative Gearing Explained

To start gearing basically means that the investment has been acquired using finance. 

Positive gearing

Positive gearing is when the income coming from rent payments is more than the expenses from borrowing (such as council rates, insurance, maintenance and interest). As you are making a profit you will have to pay tax on the property. However this means that even if your investment is not appreciating you are making money.

Negative gearing

The opposite of positive,  the income generated from the investment does not cover the costs of borrowing. Since you are losing money you can claim the losses as a tax deduction. As a result your taxable income is reduced by the mortgage expense not covered by the revenue produced from rent.

People who own negatively geared property are hoping for either of the following options. That the property increases enough in value so that when it is time to sell the profit covers the total losses, thus producing a capital gain. Or that the home will eventually become positively geared. This can happen due to higher rental fees (increase in demand, better tenants, renovation) or future refinancing reducing the interest rate so that rent becomes profitable. Obviously a combination of the two should be the desired result.

Positive gearing investments are generally more difficult to find but the big risk of negative gearing is that it may never rise in value. Both have their pros and cons and what you choose should depend upon your investment strategy.If you are negatively geared it is best you consult an accountant about tax advice.

If you would like more information or need help getting your property positively geared please contact us on (08) 9289 7777 or email info@nullrdfinance.com.au