In previous weeks, we discussed the reasons for investing in property, and how to avoid becoming a cautionary tale for others.
Now it’s time to demystify positive and negative gearing, although – there’s no substitute for advice from a financial planner or your accountant so please seek their opinion on your personal needs.
What is negative gearing?
One of the benefits of investing in property is that you can use any losses to reduce your taxable income. Often referred to as Negative Gearing – the idea is that the rental income you receive is less than the interest you pay on your loan, depreciation on the property and any maintenance and outgoings you pay throughout the year.
Why would I want to make a loss on my investment?
Although you make a loss in the short term, you might end up with a larger tax return (or perhaps a smaller tax bill if you’re self-employed) – because your losses are deducted from your taxable income, reducing your tax liability.
The assumption here is that your property will increase in value over time, compensating you for these losses at the time of sale.
What is positive gearing?
Positive gearing is when your rental income is higher than the cost to you – and you make a profit from your investment property.
What is the benefit of positive gearing?
On the one hand, this approach can make it easier to fund your investment in the short term.
On the other hand, there is no deduction to your taxable income, and you will need to pay tax on any profit you make, over and above your interest payments and maintenance costs.
What does this mean for my cash flow?
Cash flow is not the same as positive and negative gearing. ‘Cash flow positive’ means that the rental yield is higher than the interest and outgoings. ‘Cash flow negative’ means that the rental return less than the cost of holding the property.
‘Cash Flow’ doesn’t take depreciation and other tax benefits into account.
It’s possible to have a property that is cash flow positive, but negatively geared. This happens when depreciation is taken into account, tipping the scales towards the negative and therefore creating a tax deduction for the owner – even though in terms of real money there was no cost to hold the property that year.
Be sure to get expert advice about your personal situation before you opt for a positively or negatively geared property.
If you want to learn more about how to create wealth from property investment, book a no-obligation appointment with me today.
Please Note: Information provided in this article is general in nature and does not constitute financial advice. Whilst reasonable care has been taken in preparing this information, nothing contained herein should be construed as being specific to your investment objectives, financial situation or particular needs. As a Mortgage Broker, I am not qualified to advise you on your financial objectives and personal taxation matters. It is of utmost importance that you always seek the advice of qualified Financial Planners and Tax Accountants.