The Difference Between Negative and Positive Gearing

The Difference Between Negative and Positive Gearing

May 30, 2023 Off By Clare Louise

The concept of negative and positive gearing can be difficult to grasp, but it’s important to understand how they work. Negative gearing involves borrowing money to invest in an asset, such as a rental property, and the expenses (including interest) are higher than the rental income. This results in a tax deduction for the loss, which can be used to offset other taxable income. While it may seem counterintuitive to invest in an asset that is making a loss, some investors do so because they believe the capital gains when the asset is sold will outweigh the losses.

Why Would You Want An Investment That Experiences A Loss Due To Negative Gearing?

While investing in an asset that experiences a loss may seem counterintuitive, some investors are willing to do so because they believe the potential capital gain they could achieve upon selling the asset will more than compensate for their overall losses.

In addition, some investors may find themselves in a loss position unintentionally, particularly in the current economic climate. This could be due to factors outside of their control, such as a decline in property values or a downturn in the stock market.

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Moreover, tax benefits such as capital gains tax breaks can make negatively geared investments more appealing. When an asset has been held for over a year, investors can deduct all of their losses from their taxable income while only paying taxes on half of their profits.

It’s worth noting that negatively geared investments aren’t limited to property. Investors can borrow money for any investment, including shares, which may offer franking credits and dividend yields that make them a more attractive option than real estate.

Finally, under the present tax code, a negatively geared investment could provide a cash tax return ranging from 19% to 47% of the loss, helping investors manage the financial blow and pay off the loan more quickly.

Positive gearing is a type of investment strategy where the income earned from the investment property is greater than the expenses, including interest payments. This means that you have a positive cash flow, with money left over after covering all the expenses. While this may seem like a desirable investment opportunity, it can be difficult to achieve.

To positively gear an investment property, you may need to borrow less money initially or pay off a significant portion of the debt. This can limit the potential returns, as you have less money invested overall.

Look for an insurer that has extensive experience with rental property deductions, such as depreciation, interest, and repairs. Qualified insurers will understand the recent changes in the market and help you navigate the complexities of investing in rental properties.