What is positive, neutral and negative gearing? And how do they work?
If you have a positively geared investment property, it means your rental income is more than your expenses (like interest repayments and maintenance costs) so you end up with a profit. Nice!
A neutrally geared property means your rental income is the same as your expenses.
And a negatively geared investment property means your rental income is less than your expenses, so technically you make a loss on your investment. More on this later.
What are the pros of negative gearing in Australia?
You might be wondering, is negative gearing a good thing? Something negative can’t be positive… right? Turns out there are some pros because you might be able to claim your losses as a tax deduction. Plus, over time your property will hopefully increase in value, AKA capital growth.
For an example of negative gearing, take Lee. He bought an investment property for $600,000. His yearly expenses were $30,000 and his rental income was $20,000, so he lost $10,000. On the flip side, Lee then claimed his losses at tax time to reduce his taxable income. Also, after the first year his property value rose by 6%, which is great news for Lee in the long run.
Pro tip: Property taxes change from state to state, so what’s allowed in NSW might be different in VIC, QLD or another state. Chat with a tax expert for advice.
The cons of negative gearing
In the short-term, negatively geared properties don’t make a profit so you’ll probably need a bit of cash in the bank to cover your losses. Plus, if interest rates rise and you can’t meet your new repayments, you might have to think about selling.
What are the pros of positive gearing?
We think that the main benefit is cash flow. Once you’ve sorted out your monthly expenses, a positively geared property will give you more money to play with. Who doesn’t want that? And if you’re saving up for another investment property, the extra cash coming in the door could help you get another loan.
The cons of positive gearing
The extra money is nice, but it also means you have to pay more tax. Plus if you live in an urban area, you might have to hit the highway to find your next investment because positively geared properties are more common in regional towns. Road trip anyone?
Before jumping into the property market, think about which gearing strategy will work best for you. If you’ve already figured that out, it’s time to track down an epic investor home loan. Take a squiz at our super competitive interest rates, here.*
If you want to find out more about how negative gearing works or the tax benefits, use a negative gearing tax calculator or check out the ATO for more info.
* UBank is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. Credit is provided by AFSH Nominees Pty Ltd ABN 51 143 937 437 Australian Credit Licence 391192. UBank is the mortgage manager for UHomeLoan products.