What Is Negative Gearing In Real Estate?
As an investor, making your mark on the Australian real estate market can be tough – so what is negative gearing, and how can you use it to your advantage?
In order to understand what negative gearing is, first we have to wind it back to simpler terms. “Gearing” is a standalone term in the financial world that simply means to borrow money in order to purchase an asset. The reason we hear so much about it is that gearing can be positive, negative or neutral, with each offering distinct advantages and disadvantages when it comes to navigating the property market in the best possible position.
Types Of Gearing In Australia
If you’re a property investor in Australia – or looking to become one – it’s important to understand what negative, positive and neutral gearing is, and the possible benefits and risks that come with each term.
What Is Negative Gearing – The term is generally used when investors borrow money to invest into an asset (usually a property) but the income you make from that investment, i.e. the rent, is less than your expenses, meaning that you’re making a loss on paper. However, Australian law also allows investors to deduct any losses they make on an investment property from their taxable income, which makes it far easier for people to invest in the property market and pay less tax overall. Essentially, negative gearing works if the money an investor makes from a property’s capital growth is greater than the loss they make from the rental shortfall.
What Is Positive Gearing – Positive gearing is when an investor borrows money to invest into an asset, and the income that they make from that investment (such as the rent from tenants) is more than the expenses. While this means that the homeowner is earning a consistent income from their investment property, it also exposes them to paying capital gains tax should the house’s value increase during their ownership tenure and eventual sale (if applicable). As they’re earning an income from the property, the homeowner also won’t be able to make any deductions from their taxable income.
What is Neutral Gearing – Slightly less common, neutral gearing is when an investor borrows money for an asset and the income that results from that investment is equal to the expenses, such as the rent. It means that the homeowner is “breaking even” on their investment, and isn’t able to deduct any losses from their taxable income.
When weighing up the pros and cons associated with either negative gearing or positive gearing, in simpler terms it usually boils down to whether an investor wants to receive extra income in the short term via rent, or instead receive larger dividends via negative gearing on the sale of a home and pay less tax overall. Individual circumstances usually have a lot to do with this preference, so if you’re not sure what’s right for you, it’s certainly worth speaking to a finance professional.
Sourcing Further Advice On Negative Gearing
If you are ready to “level up” and get financially fit, then it’s never too early to seek professional financial advice. Whether your next goal is to retire early, take a gap year, or purchase your first investment property, George Samios and the team at Madd Life are ready and waiting.
With their entire business built on referrals, the team at Madd Loans have taken the mortgage broking industry by storm. Their overwhelmingly positive feedback has helped them to take out numerous industry awards, including the title of “Queensland’s Broker Of The Year” for four consecutive years. However, after working with a broad variety of clients in regards to their mortgage options, it made sense for the team at Madd to have the capacity to offer a full financial planning service.
If thinking about your financial future strikes a chord with you, then it might be time to speak to a professional. Whether you’re chasing mortgage solutions or a financial fairy godmother, the team at Madd work together as a collective to turn your goals into reality.