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Everything You Need to Know About Positive Gearing

When it comes to property investment strategies, positive gearing is often overlooked in favor of the more popular negative gearing approach. However, it's essential to weigh up all your options and consider positive gearing as...

When it comes to property investment strategies, positive gearing is often overlooked in favor of the more popular negative gearing approach. However, it's essential to weigh up all your options and consider positive gearing as a viable strategy for your circumstances. In this article, we'll delve into the concept of positive gearing, explore its advantages and tax implications, and highlight some additional factors to consider before implementing this strategy.

What Is Positive Gearing?

Positive gearing simply means that your investment property's rental income exceeds your home loan repayments and other property costs. In other words, you're consistently making a profit from your investment, which can be used to reduce the size of your home loan or reinvest in other opportunities. Let's take a look at an example to illustrate this concept.

Graphic of positive gearing Fig. 1: Graphic of positive gearing

Imagine Bruce, a property investor, purchases an apartment in Melbourne for $485,000. He rents it out for $575 per week, while his expenses amount to $460 per week. By subtracting the costs from the rental income, Bruce is left with a surplus of $115 per week. This positive cash flow indicates that Bruce's property is positively geared.

The Advantages of Positive Gearing

As with any investment strategy, it's important to consider the advantages and disadvantages of positive gearing. Here are some potential benefits:

  • Passive income: Investing in an area with high rental demand and strong rental returns ensures a steady income stream while waiting for long-term capital growth.
  • Positive cash flow: If your property is positively geared, its income covers all expenses, resulting in less financial pressure and flexibility in case of changing circumstances.
  • Increased lending power: Positive cash flow boosts your income, making it easier to secure additional loans and expand your property portfolio.
  • Balanced property portfolio: Owning at least one positively geared property can offset any losses from negatively geared properties and contribute to overall financial stability.

Tax Implications for Positive Gearing Strategies

Income generated from an investment property is subject to tax, and the amount depends on your income tax bracket. However, positive gearing allows you to claim several beneficial tax deductions on your investment property. Here are three significant deductions:

  • Depreciation: As a building ages, its structure and assets depreciate. You can claim this depreciation as a tax deduction if the property is being used to generate income.
  • Interest on your loan: Any interest charged on the loan used to purchase the investment property can be claimed as a rental property deduction.
  • Rental expenses: Landlords can claim various rental expenses as deductions, such as maintenance fees and property management costs.

For a comprehensive list of tax deductions, refer to our ultimate guide on investment property tax deductions.

Graphic of tax office Fig. 2: Graphic of tax office

Additional Factors to Consider

While positive gearing offers numerous advantages, there are a few other factors to keep in mind:

  • Availability: Positively geared properties are less common compared to negatively geared ones. They may be harder to find due to high demand, leading to higher prices and lower rental yields. However, with the right team of property professionals, these properties can still be located.
  • Higher initial cost: Positive gearing often requires more upfront capital, as higher property prices decrease the need for a larger loan. Smaller mortgage repayments can contribute to a higher rental income and positive cash flow.
  • Volatility: Positive gearing can be affected by high-interest rates and slow rental price growth, making it challenging to find properties with sufficient rental yields to cover expenses. Staying informed about economic and property market fluctuations is crucial.

It's essential to plan carefully and consult with property investors and professionals to make the right decisions based on your circumstances.

Key Takeaways

Positive gearing involves generating rental income that exceeds loan repayments and expenses. While it may be difficult to find positively geared properties and higher income tax is likely, there are strategies to identify the right property for your circumstances and minimize your tax obligations. Building a team of experienced professionals and claiming all eligible tax deductions are crucial steps toward maximizing the return on your investment.

Depreciation schedules, in particular, can significantly impact your returns. At Duo Tax, we understand the importance of maximizing every dollar. Our quantity surveyors offer expertise to help you achieve the full potential of your investment. Contact us today to see how we can assist you.