Negative gearing is a commonly used term to describe a situation where expenses associated with an asset are greater than the income earned from the asset. Gearing is simply borrowing money to buy an asset. The income earned from the investment property is positive or negative geared.
• Negative gearing is when the investment property rental return is less than your interest repayments and other property related expenses.
• Positive gearing is when the investment property rental return is higher than your interest repayments and other property related expenses such as strata levies, council and water rates.
• Neutral gearing is when the investment property is where the expenses and income are roughly equal.
Benefits of negative gearing is one of them when the investment property of the market value should increase over time. Property in Australia generally increases in value over the long term, even when it drops in prices from time to time generally property value has increased. Also, negative gearing helps many investors to have regular income from the rent to cover some of their ongoing costs. However, any rental loss incurred during the financial year may be offset against other income earned, such as the salary. This can reduce your income and how much tax you might pay.
Benefits of positive gearing, the income you get from the investment property can help you confidently repay your loan without adding the payment out of your pocket. If the investment property is positively geared then, the net rent income will be subject to income tax. Investors pay tax on earned rental income on an investment or any net profit you make when you sell the property, the profit is generally called a Capital Gains Tax.
When it comes to negative gearing there are so many pros and cons of negative gearing. Some of the pros is that property investments or investors provide accommodation for tenants and help to ensure rent amounts are competitive. Cons of negative gearing the investment property may sit empty while a tenant is secured, also ongoing costs can be significant.
Overall, positive and negative gearing has its own benefits and drawbacks, depending on personal circumstance, current income and debts. For more information on property investment,
feel free to contact Lana and her team at Matovic Business Accountants.
Email us at info@matovicaccounting.com.au or call (07) 3557 5721.
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