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What is negative and positive gearing?

When tuning in to media coverage around property and particularly investment properties, there is a good chance you’ve heard the term ‘negatively geared’. Of course, as balance would have it, there is also another relative concept called ‘positively geared’.

Put simply, negative gearing is where you’ve borrowed money to invest, known as gearing, where the rent paid is less than the ongoing expenses of the property. These expenses include any maintenance, as well as your home loan repayments.

Around 60% of investment properties in Australia are negatively geared. A positively geared investment property is one that generates a surplus, meaning the owner is generating an income from the property.

Why wouldn’t you positively gear, right? It’s a no brainer?

For starters, positively geared properties are harder to come by and typically found in more regional areas. In most cases you won’t simply be able to hike up the rent charged to a tenant, as they may move out in lieu of something more affordable. As a positively geared property is generating an income, you may also need to pay tax on these earnings.

On the other hand, negatively geared properties may attract an income tax deduction. Either way it’s important to seek tax advice, and before making any decisions, consult with a professional.

Don’t forget that rent isn’t the only factor to consider in owning an investment property.  Any increases in property value over several years may also have a financial impact, so it’s important to take all components into account and review any legislative changes or regional differences.

Disclaimer: The ideas, discussions, options and details expressed in SCCU Blogs are for general informational purposes only and are not intended to provide specific personal advice or recommendations for any individual or on any specific security or investment product. We intended only to provide education about the financial and banking industry to make the complex simple, and help everyday customers realise their dreams.

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