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Cracking the facts

What is positive and negative gearing?

  • March 26 2020
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Cracking the facts

What is positive and negative gearing?

By Digital
March 26 2020

Do you know the difference between positive and negative gearing? In this video, we explore how positive and negative gearing can affect your investment property strategy. 

What is positive and negative gearing

What is positive and negative gearing?

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  • March 26 2020
  • Share

Do you know the difference between positive and negative gearing? In this video, we explore how positive and negative gearing can affect your investment property strategy. 

What is positive and negative gearing

“Gearing” is a practice common in property investing. A property can be positively or negatively geared. By definition, a property is positively geared if the income from the investment is higher than the interest and other expenses. Therefore, the investor benefits from a consistent cash flow as well as a safety cash buffer. The extra money will have to be paid for as part of tax on additional net income. Positively geared properties are also referred to as “cash flow properties” due to the income they generate.

On one hand, negatively geared properties don’t make enough to cover all expenses –   essentially making a loss.

But a negatively geared property is not entirely set to fail. Investors who are confident about the capital growth that the property will achieve in the future (which will allow them to offset their property’s losses through the property’s capital appreciation) can still put their bets in negatively geared properties.

Additionally, negative gearing often attracts investors due to the tax benefits of an investment loss. By implementing negative gearing as a strategy, the property-related costs are, in essence, paid for by your tenant through rental returns, by the Australian Taxation Office through tax savings and by your own surplus cash flow.

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Still, experts remind investors that it is not advisable to invest in property solely for tax purposes.

While tax deductions are welcome benefits, they should not be the main consideration for buying an investment property. Ultimately, investors should focus on increasing income and the overall return on investment.

Explore nestegg to learn more about property investment strategies.

What is positive and negative gearing?
What is positive and negative gearing
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