Positive Gearing Vs Negative Gearing Positive gearing, negative gearing and depreciation: how each affects your tax and your cash flow.
Have you recently been looking into the best home loans or commercial property loans for a possible investment property? Are you wanting to learn more about positive gearing and negative gearing and the effect this can have on your finances and properties? The team at Greenline Home Loans can help!
This article will help you understand what gearing is, the features of positive gearing and negative gearing, the benefits of both and tips to keep in mind to get the most out of your investment property.
What Is Gearing?
Gearing refers to when you borrow money to invest and is most commonly referred to when speaking about investment properties. Positive and negative gearing refers to when somebody buys a property, often an investment property, which is then rented out or brings in a form of income. Both positive and negative gearing strategies can have benefits and drawbacks, making it important to consider which best suits you, your personal circumstance including your income, debts, and financial position as well as your risk preferences.
What is Depreciation?
The depreciation of a property refers to natural wear and tear over time of a building’s structure and assets, which property investors can claim as tax deductions in each financial year. Depreciation is often linked to both positive and negative gearing as both depreciation and capital allowances are legitimate tax deductions which can be claimed.
The main benefit of depreciation for a property which is positively geared is the reduction in the amount of tax payable. When you claim for depreciation on a property, the profit you make on the property will be lower meaning less tax will be payable.
The main benefit of deprecation for a property that is negatively geared is an improved tax position. For a property which is negatively geared, when you claim for depreciation this can increase the overall loss of the investment property which can then be claimed as a tax deduction against personal income. As a result of this process, there will be a decrease in the investors tax liability which leads to a higher tax refund.
Whether your property is positively or negatively geared, there are several benefits of utilising a depreciation schedule. Reach out to the friendly team at Greenline Home Loans today to find out more!
Understanding Negative Gearing And Its Benefits
When the income from the property is less than the rental return, interest, or other related property costs, this is referred to as negative gearing.
The main benefit of negative gearing is that any net rental income you may lose throughout the year may be offset against your salary or other income you may earn over the financial year. When this happens, it reduces your taxable income and how much tax you will need to pay. Overall, if you have a reduced taxable income, this could save you money in the long run.
There are several other benefits of negative gearing which may include:
- Capital growth over time generally means the investment property should increase in market value
- An overall reduction in tax liability
- Having a regular income through the tenants
It is important to keep risks in mind when considering negative gearing such as ongoing ownership costs, initial purchase costs and the responsibilities tied with becoming a landlord. Reach out to the team at Greenline Home Loans who can assist you with covering which risks you are willing to take, the best strategy and how your personal circumstances and financial situation relate to applying for commercial property loans or a home loan.
Understanding Positive Gearing And Its Benefits
When the income from the property is more than the rental return, interest, or other related property costs, this is referred to as positive gearing.
If you are making more money in comparison to your net rental income and other property related expenses, this can leave you with more money in your pocket which is often used to ensure that loan repayments are met, although it can be saved to assist with paying for external things.
One thing to keep in mind regarding positive gearing is that your net rental income can be subjected to tax, which may impact the overall increase over time. It is important to consider your strategy and long-term goals when deciding on an investment property, which is why the team at Greenline Home Loans are here to help!
Consider Your Risks With Positive And Negative Gearing
It is important to consider your risks with positive and negative gearing strategies. In relation to negative gearing, it is recommended to choose your investment property carefully, you have a suitable income for the repayments you are required to make and for any property-related expenses and to consider any insurance you may require.
Reach out to the friendly team at Greenline Home Loans who will be able to assist with the best home loans and commercial property loans for an investment property. The team will be able answer any questions you may have about positive and negative gearing strategies and which route is the best to take for your needs, personal circumstances, financial situation, and preferences!
Reach out to Greenline Home Loans today!
Positive vs negative gearing: FAQs
What is gearing?
Gearing means borrowing money to invest, and the term is used most often for investment property. Positive vs negative gearing describes whether a rented property's income covers its costs. Each strategy has benefits and drawbacks, so the right one depends on your income, debts, financial position and appetite for risk.
What is positive gearing?
A property is positively geared when the income it produces is more than the costs of holding it: the rent exceeds the interest and the other property expenses. The surplus is money in your pocket, often used to cover the loan repayments, but the net rental income can be subject to tax.
What is negative gearing?
A property is negatively geared when the income from it is less than the expenses of owning it, so the loan interest and other costs exceed the rent. For example, if a property earns $20,000 in rent in a year and costs $25,000 in interest and expenses, it is negatively geared by $5,000. That net loss can be deducted from the owner's other income.
How does negative gearing work?
The net rental loss for the financial year is offset against your salary or other income, which reduces your taxable income and the tax you pay. Over time that can save money, though the property is still running at a loss each year until rent rises or costs fall, and the strategy relies on capital growth to pay off.
What is a positively geared property?
One whose rent more than covers its costs, so it produces income from day one rather than a deductible loss. It suits investors who want cash flow now; keep in mind the net rental income is taxable, which can affect the increase over time.
What are the benefits of negative gearing?
The article lists three: capital growth over time, as the property should rise in market value; an overall reduction in tax liability from the deductible loss; and a regular income from tenants that offsets part of the costs.
What are the risks of gearing?
Ongoing ownership costs, the initial purchase costs and the responsibilities of being a landlord. With negative gearing in particular, choose the property carefully, make sure your income suits the repayments and property expenses, and consider the insurance you may need.
How does depreciation affect gearing?
Depreciation is the wear and tear on a building's structure and assets, which investors can claim each financial year. On a positively geared property it lowers the profit and so the tax payable; on a negatively geared property it increases the loss that can be claimed against personal income, improving the tax position either way.
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Articles are general information. A Greenline broker can look at your own situation and compare options from 50+ lenders, with no obligation.
This article was published on 9 November 2022 and describes the lending environment at that time. Rates, grants and lender policies change.