What is positive and negative gearing?
‘Gearing’ simply describes borrowing money to make an investment. It can be split into 3 definitions depending on the kind of income generated from the investment – negative, positive and neutral.
A negatively geared property means your rental income (and expenses) are less than the mortgage repayment, resulting in a deficit.
A positively geared property means your rental income is more than the repayments.
A neutrally geared property means your rental income is about the same as your repayments.
What are the benefits of negative gearing?
Australian tax law allows you to deduct interest repayments (and other expenses) as an expense for investment properties. So in cases where your property is negatively geared, you can often offset losses against other income streams (e.g. your salary) to reduce your total taxable income and tax payable. Note: property taxes differ from state to state, so what’s true for gearing in New South Wales might be different from Victoria or Queensland.
What can I claim?
As per the ATO, expenses for which you may be entitled to claim when negative gearing include:
- advertising (for tenants)
- body corporate fees and charges
- council rates
- land tax
- cleaning, repairs and maintenance
- gardening and lawn mowing
- insurance (building, contents, public liability)
- interest expenses
- property agent’s fees and commission
- some legal expenses
- travel undertaken to inspect the property, to collect the rent or for maintenance.
What are the benefits of positive gearing?
A positively geared property doesn’t mean you’re doing anything wrong — quite the opposite! Having a surplus on your cash flow means could pay off your investment loan faster, and could contribute to a higher disposable income or even help you secure another investment property. You might miss out on a few tax breaks but if you’re after short-term returns (or just bought your property before the market caught up) it’s a good position to be in.
Why is negative gearing always in the news?
Though it’s a policy designed to help first-time investors reduce the risk on their investments, it’s often taken advantage of by higher-income investors with multiple properties, significantly raising house prices while doing very little for supply. Cue angry headlines.
With politicians clamoring on all sides to make housing more affordable, negative gearing is often cited as one of the quickest ways to ease the burden on first home buyers.
Is negative gearing worth it?
Negative gearing isn’t just a term, but a strategy. It works best when the capital growth of your house is greater than the loss you make from the rental, and generally favours younger home owners as a pre-retirement investment strategy (if you’re older, you’d want to be making a more immediate return on investment). It also requires a big upfront investment, and isn’t for those who have a tight cash flow (as you are susceptible to interest rate rises or property depreciations). It’s also a lot of work to maintain, so isn’t for those seeking passive income in the short term.
At a policy level, negative gearing isn’t a guarantee. We mentioned earlier many politicians have negative gearing in their sights to protect the next generation of homeowners (and their votes). There’s a realistic chance this policy will change as governments do, so it’s wise to not just invest based on tax benefits alone.
Like all important things, it’s important you have a strategy in place to ensure negative gearing works for you. When purchasing an investment property, you’ll want to do your research to ensure you have some financial breathing room in case laws or markets change, and purchase a property that’s likely to appreciate over the course of your investment loan.
Find out how much you can borrow with our mortgage calculator.
As with all investments, your strategy should always align to your circumstances. Negative gearing can be a volatile strategy that balances short-term loss with the expectation of long-term rewards, so you make sure you’ve done your research (especially any state-specific laws), have weighed up your options, and decided an approach that works for you. Once you’ve done that, gear away!