2 Dec 2011
For those about to invest in real estate, you may be confused about the differences between positive, negative and neutral gearing.
Each gearing option can be profitable for different reasons, so it is important to understand how each works before deciding which option will be the most suitable for you.
Here is a basic explanation of each gearing strategy:
Positive gearing is where the annual rental income from a property is higher than the annual loan repayments and costs. In this situation you are making an extra income from your property; however this income is taxable and hence needs to be declared at tax time.
Positive gearing can be very profitable for investors, especially where there are high rental yields, and fans of this type of investment argue that the profits made can then be used to help fund further investment properties.
With this type of property keep in mind that you will have to also pay capital gains tax should you decide to sell the property.
If your property is negatively geared then its rental income is less then the costs needed to maintain and keep the property.
Negatively geared properties are generally the first step for most investors and they are attractive because of the huge tax benefits.
The losses incurred on negatively geared properties can be offset against other forms of income as a tax deduction, therefore reducing taxable income.
Another benefit of negative gearing is that there is the potential to make long-term gains through capital appreciation. This is where the value of your property increases larger than the costs.
Over time though, many investors choose a negatively geared property with the hopes that it will eventually become neutral or positively geared.
Neutral gearing is when the income from the property is exactly equal to the borrowing and maintenance costs. In this situation, the income is taxable, but the borrowing costs are tax-deductible.
Neutral gearing is a safe option for investors as there are little to no costs to keep the property, however gains can still be made from the capital appreciation.
Remember it is always a good idea to talk to an accountant or a financial advisor regarding the gearing strategy that is most suited to your financial situation. If you are interested in finding an investment property in the area though, then feel free to give me a call at Professionals Paradise Realty for further advice or information.