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Positive vs negative gearing

  • Published in FAQs

Most people will borrow to invest in property. This is called 'gearing'. The more you borrow, the more you will pay in interest

 

Negative gearing

  • Negative gearing is when your income from an investment is less than your expenses. In the case of property this means the rental income you receive is less than the interest and other expenses you pay. Your investment is making a loss which most investors hope they will make up with a capital gain when the value of the property increases.

  • A loss can be used to reduce your taxable income which will reduce the amount of tax you pay. See the Australian Taxation Office's section on residential rental properties for details of income you must declare and expenses you can claim.

  • Remember, you are only reducing your tax payable because the income from your investment isn't covering your expenses.

 

Positive gearing

  • Positive gearing is where your income from an investment is higher than your interest and/or other expenses. This means you will have extra money in your budget but you will have to pay tax on the additional net income.

 

Positive vs negative gearing

  • Many investors focus on the tax benefits of negative gearing without considering the loss in after tax income.

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