Positive or negative gearing? What’s the difference?
The terms ‘positive’ and ‘negative gearing’ have been the topic of the country for the last few weeks and will continue to be leading into the election in early July. The effects of these strategies on our economy are being hotly debated right now and the average Australians who use these strategies on a day to day basis are eagerly awaiting clarification on the policy.
So what is the fuss about? Well let’s quickly recap the different types of gearing.
- Negative gearing – Where an investor purchases an income-producing asset for the direct purpose of making a loss. Those subsequent losses can then be used as a tax deduction on their other taxable income (i.e. their wage)
- Positive gearing – Where the income produced by the asset exceeds the overall expenses of owning the asset (including interest on the loan). This asset makes a profit before and after taxation is taken into account.
So, which one do you use?
This is where expert advice is required to tailor to your financial situation. Some investors may need tax help and therefore negatively gearing a property would suit their needs more so then a positively geared investment and vice versa, if you want to generate more income. For example, reduce the debt on your principle place of residence (PPR), than a positively geared investment may be for you. This style of strategy helps increase your income position and therefore allows you to make extra repayments on your PPR. See the below example.
Investment property purchase price = $612,500 Rental Income = $780 p/w
Overall costs per week (Including mortgage interest only repayments, rates, insurance, agent fees, letting fees and vacancy allocation.) = $700
Positively geared = $80 p/w
The $80 per week that is generated by the investment property can then be used to make extra repayments on your PPR mortgage helping to pay it down faster and improve your net wealth on a week-to-week basis. A strategy like this is best used with a financial adviser whom can give financial advice tailored to your individual needs and ensure every dollar is working for you.