Positive versus negative gearing

One of the advantages of investment property is that losses can be tax deductible. To do so however, means making a loss which can then be used to reduce your tax at tax time. This is called negative gearing.

On the other hand, if you make a profit on the investment, you’ll not be able to claim a tax deduction. You will, however, not make a loss on the way through. This is called positive gearing.

Negative gearing

If you are in the highest tax bracket, you are paying a large proportion of tax on some of your income. Negative gearing will reduce your income to a lower tax bracket, by making a loss on the month by month cost - a loss you can claim in your tax return.

This approach assumes that the property that you have bought will increase in value over a period of time, and that this increase will outweigh the losses that you have made.

Each year you pay interest on your loan, which you are able to claim as an expense along with the other costs incurred during the year - such as property maintenance. You must also then declare the income received from the property. The difference will either be a profit or a loss. If it is a loss it will effectively reduce your taxable income.

Speak to a financial planner to see if this type of investment strategy is right for you.

Positive gearing

Positive gearing is where the annual rental income received from the property is higher than the annual loan repayments and costs.

The benefit here is that you earn extra income but this is taxable. Also make sure you include the capital gains tax you will have to pay if you decide to sell the property.

Make sure you discuss your options with a financial planner.