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The biggest difference between positive and negative gearing is how it impacts your taxable income. Which strategy you decide to go with will depend on your financial situation and investment goals.
What is negative gearing?
In a nutshell, negative gearing means that the cost of owning an investment property outweighs the rental income. This creates a taxable loss, which can usually be offset against your tax liability from your ordinary income. This strategy can allow you to legitimately claim a tax deduction and use your tax to cover the expenses of holding the property.
What is positive gearing?
Positive gearing involves buying a property where the total rent return covers all the costs of holding the property and also returns a surplus cash flow each month. This strategy can potentially allow you to buy multiple investment properties as the surplus cash flow makes you an attractive borrower. It could also boost your borrowing capacity and help offset the costs of any negatively geared properties in your investment portfolio. However, positive gearing can also mean that you end up paying more tax as you are earning more income.
Negative gearing vs positive gearing
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Positive gearing |
Negative gearing |
|---|---|
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You’re making an ongoing net profit on the rental property |
You’re making an ongoing net loss on the rental property - which can be offset against your taxable income |
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You have an extra cash flow which could go towards making extra repayments, renovations, savings, into an offset account, or even be used to buy another investment property |
You need to have extra cash available to cover the net loss you’re making on the property |
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You may need to pay tax on your investment property's earnings |
The net loss you’ve made could allow you to claim a tax deduction on your other income (e.g. if you made a net loss of $10,000 on the property and earn $80,000 per year, you may only need to pay tax on $70,000) |
|
The property is generating rental income and capital gains |
The property is solely generating capital gains |
You can check out our investment property loan products and see which one will be perfect for you so you can start investing today.
