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These aren’t building or engineering terms, but instead pertain to investment costs and profit.
When it comes to property investment, ‘gearing’ refers to using borrowed money to invest. A property can be positively geared or negatively geared depending on specific circumstances.
What is positive gearing?
Positive gearing is when the profit generated from the investment property exceeds the costs of owning and operating it. In short, investors with a positively geared property are operating at a net gain.
Example of positive gearing
An investor buys a property worth $275,000 and takes out a Variable Bare Investor Home Loan of $250,000 with an interest rate of 6.34% p.a. and a loan term of 15 years. This results in an estimated $1,725 monthly loan repayment, or approximately $20,700 per year.
Suppose total expenses on maintenance are 1% of the value of the property, or around $2,750 annually.
If the property generates rental income is $28,600 per year and total expenses, including mortgage and maintenance costs, are subtracted, the investor will have a surplus of $5,150. Because the investor draws a net profit, their property is considered positively geared.
Pros and cons of positive gearing
Here are some benefits and drawbacks to consider when choosing a positive gearing strategy.
Pros
- Property generates enough revenue to cover costs (pays for itself)
- Provides a steady cash flow that can support other expenses or investment opportunities
- Additional income may improve borrowing capacity
Cons
- Higher taxable income, which may increase tax obligations
- Vacancy periods could affect the profitability of the property
- Rising interest rates may increase overall expenses
What is negative gearing?
Negative gearing occurs when the cost of owning and operating an investment property exceeds the income it generates – basically, running at a net loss. Under current tax rules, investors can generally deduct this loss against their taxable income to reduce their tax bill.
An investment property that doesn’t earn more than its expenses may seem counterintuitive, but in the right situation, it could be a worthwhile strategy. Some investors rely on the capital gain when they sell the property to offset earlier losses in rental income.
Pros and cons of negative gearing
Before choosing negative gearing as an investment strategy, it’s important to weigh the advantages and disadvantages.
Pros
- Potential capital growth may offset potential long-term losses
- May suit investors focused on long-term wealth accumulation
- Potential tax benefits under current rules
Cons
- Ongoing losses could take a toll on finances
- Finances may be harder to manage if interest rates or expenses increase
- New negative gearing and capital gains tax reforms could impact potential profits
Recent reforms to negative gearing and capital gains tax (CGT)
The Australian Government has proposed new reforms to negative gearing and capital gains tax as part of the 2026-27 Federal Budget.
Starting 1 July 2027, negative gearing for newly purchased established residential properties may be limited. New builds are expected to remain exempt from this measure.
Properties held before the announcement on 12 May 2026 at 7:30 pm AEST are expected to be grandfathered under the existing rules. The losses incurred of affected properties purchased after this date will only be deductible against other income from residential properties.
Excess losses can still be carried forward to offset residential property income in the future.
The Government has also proposed changes to capital gains tax. The 50% CGT discount for individuals, trusts, and partnerships will be replaced with a cost base indexation, as well as a 30% minimum tax rate on capital gains. These changes will only be applied to gains accrued from 1 July 2027.
These changes will apply to individuals, partnerships, companies and most trusts. Trusts such as managed investment funds and SMSFs or superannuation funds will be exempt.
Putting gearing strategies into perspective
There’s no right or wrong way to invest in property. Your investment strategy should be guided by your goals and financial capabilities. Understanding these two factors and knowing how policy changes could affect potential profits can help you figure out what type of property to buy and which gearing strategy may suit you.
If you’re ready to take the next step in your investment property journey, start by finding the right investment loan. At loans.com.au, we offer a range of investment property home loans with competitive rates and useful features.
Whether you’re a seasoned investor or a first timer building your portfolio, our team of lending specialists is available to help find the suitable product for you.
Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek professional advice tailored to your personal circumstances before making any financial decisions.
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