October 23, 2017

Negative Gearing vs Positive Gearing

As an Australian property investor, there are several aspects that you have to deal with. One of these is the investment property tax. When you generate income from your property, you have to pay the right taxes. Another aspect that you need to know is gearing. It means borrowing money to invest in a business, property, or funds. An investment can be positively or negatively geared depending on the cost incurred and the income generated. If your investment generates profit, it is positively geared. On the other hand, when the income is less than the cost of managing the investment, it is negatively geared.

What is gearing?

It means borrowing money to invest in a business, property, or funds. An investment can be positively or negatively geared depending on the cost incurred and the income generated.

Gearing can be a positive or a negative. In this article, know more about the differences between positive gearing and negative gearing:

Positive Gearing

Positive gearing is also referred to as “cash flow property” simply because it generates more money than the expenses from the investment. You benefit from the income that can also be used for other purposes, and this can put your finances on favourable conditions. With positive gearing, you can diversify or venture into other investments that can potentially generate more income. However, the income you generate is taxable. The higher the income, the higher your tax obligations will be.

Negative Gearing

Negative gearing, on the other hand, occurs when the income you generate is less than the cost of owning the investment. So you need to be prepared for the losses that you incur. It is a negative cash flow, but this will reduce your taxable income. A negatively geared investment appreciates in value over time.

Positive vs Negative

Negative gearing is a common strategy that is used to minimise property tax. Take note, however, that you need to reduce your income if you want a lower tax.

If you need to borrow money for your investment, make sure that it is positively geared. In this way, you can increase your income and at the same time, increase your investment returns.

Investment property tax, positive gearing, and negative gearing are just some of the terms that an Australian property investor will encounter. Have a better understanding of these aspects so you can make well-informed choices. It may be also be helpful to seek advice from a qualified individual so you can better understand these aspects and other terms related to investment property tax and gearing.

Got other ideas on property tax in Australia? Share your tips in the comments section.

About the author  ⁄ Marxa Dillan

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