Finding the right gear

When it comes to investment properties, there are two main ways they can be structured – positively geared or negatively geared. Let’s take a look at both.  

Negative gearing is when the cost of owning a property outweighs the income it produces. While it might not sound like an ideal situation (effectively costing you money), these losses can often be tax deductible – and this is the key reason many investors choose to negatively gear their properties, for the tax benefits. This approach is often taken on properties that are expected to grow in value over time.
There are also some things to be wary of with negative gearing. For example, what if you don’t have tenants for a period of time or interest rates rise suddenly and you need to find extra money to cover these costs? Will you have enough, knowing that you’d previously been recording a loss on the property? So it’s also worth having some back-up funds if you choose to negatively gear.
As you can probably guess, positive gearing is when the income produced by a property outweighs the cost of owning it. While this is normally a great thing, it doesn’t come with any tax breaks, as there are no losses to claim.
In fact, there can actually be additional tax to pay on income derived from a positively geared investment. So extra funds will need to be set aside for these. The same issues regarding vacant tenancies and interest rate rises can affect positively geared properties, but it’s more likely that the owners will have funds to cover these – as a result of their cashflow positive situation with the property.
Choosing between positively or negatively gearing a property needs to be done carefully, and based on your particular circumstances. To determine which situation might suit you best, talk to a financial adviser.

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