What is negative gearing?
Quite simply, negative gearing is when the costs of your investment exceed the income in that financial year – when talking about property what this mean is the rent, rates, management fees, repairs and maintenance, insurance and any other costs of owning the property are more than the rent you’ve received in that year.
Under current tax legislation you’re allowed to claim this shortfall against your income to receive a tax break – but keep in mind, you only get back the tax on that dollar spent, not the whole dollar, so ideally we would prefer a situation where the property doesn’t cost us anything at all, negative gearing is just a small benefit to help you grow your wealth and fund affordable housing for those who want or need to rent.
Most investors who take on negatively geared property do so in the hope that the growth in value will make up for their losses along the way.
What is positive gearing?
Positive gearing is the opposite state, so simply the rent exceeds the costs of running the property. Where interest rates are low and rents are high positively geared properties – which used to be hard to find – are much more common now. Any rent you receive after your costs is of course taxable income and goes onto your tax return – but remember you still keep more than you pay out in tax so it’s still a win.
Right in the middle is neutral gearing, where the costs and the income are more or less equal.
But have you heard of negatively geared, positive cashflow property?