Negative gearing occurs when the total expenses linked to owning an asset—like an investment property—surpass the income generated from it, including interest repayments.
For example, if your rental property earns $3000 per month, but your combined expenses (loan interest, insurance, property management, maintenance, etc.) amount to $3,500 monthly, your property is negatively geared.
With negative gearing, investors can offset the financial shortfall against other sources of income, such as wages or salaries, which can reduce their overall tax liability.
In contrast, positive gearing means your property’s rental income is higher than its ongoing costs. Neutral gearing refers to a situation where income and expenses from the property are nearly equal, resulting in neither a profit nor a loss.
Across Australia, it’s estimated that around two out of every three rental properties—over one million—are running at a financial loss. So why would someone choose an asset that isn’t making a profit?
Many investors are comfortable with negative gearing because they anticipate a strong capital gain in the future—the difference between the sale price and original cost of the property—that will outweigh the short-term losses.
The option to claim those losses as deductions to reduce taxable income is another major incentive, particularly for high-income earners looking to decrease their annual tax obligations.
Positive gearing occurs when the rental income you earn from tenants exceeds your mortgage interest and other associated property costs, such as council rates, water charges, and strata fees.
The income from a property that is positively geared can increase your cash flow and give you more security when it comes to paying off your loan. Additionally, it can help you save money for other expenses. However, remember that if your property generates positive gearing, the net rental income will be taxed as part of your income.
Just like rental income from an investment property is taxable, any net profit you earn from selling the property is also subject to tax. When you profit from selling an investment property, the gain is usually classified as a capital gain, and the tax on this gain is called Capital Gains Tax (CGT).
The amount of CGT you owe depends on several factors. For instance, if you sell at a profit after owning the property for more than a year, you may qualify for a CGT discount.
Additionally, There is a capital gains tax (CGT) discount of 50% for Australian residents who have owned an asset for 12 months or more.
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