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Everything You Need to Know About Positive Gearing

CEO Khai Intela
When it comes to property investment strategies, positive gearing is often overlooked in favor of negative gearing. However, it's essential to consider all your options and weigh up the pros and cons based on your...

When it comes to property investment strategies, positive gearing is often overlooked in favor of negative gearing. However, it's essential to consider all your options and weigh up the pros and cons based on your circumstances. In this article, we will delve into the world of positive gearing, exploring what it is, its benefits, tax implications, and other factors to consider.

What Is Positive Gearing?

Positive gearing occurs when the rental income from your investment property exceeds your home loan repayments and other costs. In simpler terms, it means you are making a profit from your investment property. This surplus income can be used to reduce the size of your home loan or reinvest in other ventures.

Graphic of positive gearing Image: Graphic of positive gearing

For example, let's consider Bruce, who purchased an investment property in Melbourne for $485,000. He manages to rent out the apartment for $575 per week, while his property costs amount to $460 per week. In this scenario, Bruce has a surplus of $115 per week, indicating that his property is positively geared. This additional income can contribute to his financial goals and provide stability.

Advantages of Positive Gearing

Positive gearing offers several advantages that can benefit investors in various ways. These advantages include:

  • Passive Income: Investing in an area with high rental demand and strong rental returns enables you to generate a steady income stream while waiting for long-term capital growth.
  • Positive Cash Flow: With a positively geared property, your rental income covers the property expenses, reducing reliance on your other income sources. This financial stability is especially valuable during uncertain times.
  • Increased Lending Power: A positive cash flow enhances your income, making it easier to secure additional home loans and expand your property portfolio.
  • Balanced Property Portfolio: If you own multiple investment properties and utilize different strategies, having at least one positively geared property can offset any shortfalls from negatively geared properties.

Tax Implications of Positive Gearing

Income generated from your investment property, like your wages, is subject to tax. However, positive gearing offers tax benefits as well. By properly claiming all eligible investment property tax deductions, you can reduce your taxable income and the amount of income tax you pay each year.

Graphic of tax office Image: Graphic of tax office

The top three investment property tax deductions to consider are:

  1. Depreciation: You can claim the depreciating assets of your property each year as a tax deduction, offsetting their declining value due to wear and tear.
  2. Interest on Your Loan: The interest charged on your investment property loan can be claimed as a rental property deduction, potentially providing significant tax benefits.
  3. Rental Expenses: As a landlord, you can claim various expenses associated with your rental property as deductions, thereby reducing your taxable income.

It's essential to stay informed and updated on all available tax deductions to maximize your returns. Consider consulting experts in property investment and tax planning to ensure you make the most of these tax breaks.

Other Factors to Consider

While positive gearing offers significant advantages, there are a few factors to consider:

  • Availability of Positively Geared Properties: Positively geared properties are rarer compared to negatively geared properties, making them more challenging to find. Although they are in high demand, with the right support and guidance, you can locate suitable options.
  • Higher Initial Cost: Purchasing a positively geared property may require more upfront capital due to higher property prices. However, this can result in smaller loan repayments, making it easier to generate a profit from rental income.
  • Potential Volatility: Positively geared properties can be more vulnerable during periods of high-interest rates and slow rental price growth. It's crucial to stay informed about economic and property market fluctuations and plan accordingly.

To make the right decision for your circumstances, it's advisable to build a team of property investors and professionals who can guide you through the process.

Key Takeaways

Positive gearing is a property investment strategy that aims to generate higher rental income than the associated expenses. While positively geared properties can be harder to find, they offer advantages such as a passive income, positive cash flow, increased lending power, and a balanced property portfolio.

It's important to be aware of the tax implications and leverage all available deductions to optimize your returns. Depreciation, interest on your loan, and rental expenses are key deductions that can significantly reduce your taxable income.

Finally, consider various factors such as property availability, initial costs, and market volatility while planning your positive gearing strategy. Build a team of experts who can assist you in making informed decisions and maximize your investment potential.

As passionate property investors, we at Duo Tax understand the importance of every dollar. Our quantity surveyors possess the expertise to help you maximize your returns. Reach out to us today and discover how our services can benefit you.

Picture: Graphic of positive gearing