Gearing is one of those terms that comes up in almost every property investment conversation, yet it is often misunderstood. Knowing the difference between positive and negative gearing helps you understand how a property will affect your cash flow and your broader plans.
What does gearing mean?
Gearing simply means borrowing money to invest. When you take out a loan to buy an investment property, that property is geared. Whether it is positively or negatively geared depends on how the rental income compares with the costs of owning it.
Negative gearing
A property is negatively geared when its costs, including loan interest, maintenance, insurance, rates and management fees, are higher than the rent it earns. In other words, the property runs at a loss each year.
Under current Australian tax rules, that loss can generally be offset against your other taxable income, which may reduce the tax you pay. Many investors accept a negatively geared property because they expect the value to grow over time.
The key thing to understand is that a tax benefit does not cancel out the loss. You are still out of pocket, so your income needs to comfortably support the shortfall.
Positive gearing
A property is positively geared when the rent it earns is higher than its costs. The property produces income, which is generally taxable.
Positively geared properties can help your cash flow and make it easier to hold your investment or service future borrowing. The trade-off is that they may not always offer the same growth potential as some negatively geared properties.
Neutral gearing
Some properties sit in the middle, where rent roughly covers the costs. Over time, as rents change and loan balances reduce, a property can move from negatively geared to neutral or positive.
Which is better?
Neither approach is right for everyone. The better fit depends on your income, your tax position, how long you plan to hold the property and what you need it to do for you. Many investors hold a mix as their portfolio grows.
What matters most is choosing a property because it fits your strategy, not purely for its tax outcome. Tax rules can also change, so it is important to speak with your accountant about how gearing applies to your situation.
Make the numbers work for you
Understanding how a property will be geared before you buy helps you plan your cash flow and avoid surprises.
If you would like help working out what suits your situation, the team at Mirren Investment Properties is here for you. Call us on 02 8814 5275 or book a free strategy session and we will help you build a strategy around your goals.
This article is general information only and does not take into account your personal objectives, situation or needs. It is not tax advice. Please seek professional advice before making any investment decisions.
