What Is Negative/Positive Gearing And How Does It Work?
Property jargon doesn't come naturally to everyone. What does negative or positive gearing really mean?
Property jargon doesn’t come naturally to everyone so what does negative or positive gearing really mean? As the property market is affected by government changes, it’s important you really understand what negative gearing means.
Let’s start with the basics. Gearing in property buying terms means borrowing money to purchase an asset. There are three main types of gearing – negative, neutral and positive.
Negative gearing is when you borrow money to invest into property and the income you make from that investment, that is rent, is less than your expenses. Simply, this means that you’re making a loss. Making a loss when investing in property is essentially not ideal but currently, negative gearing allows investors to deduct any losses they make on an investment property from their taxable income.
Neutral gearing is when you borrow money to purchase an asset with the income being equal to the amount borrowed. This means that you are breaking even on your investment and unable to make any deductions to your taxable income.
Positive gearing is when you borrow money for an investment and make money from that investment, that is from rent. This means that you are earning a consistent income from your investment property and also means that you will make a capital gain from the sale of the property if property values increase during your ownership. As you’re earning income from your property, you won’t be able to make any deductions from your taxable income and the income from your investment property will be subject to income tax at your marginal tax rate.