Investing is filled with a range of strategies and options for potentially increasing your wealth. The practice of using a loan to purchase an investment is known as gearing. Both positive and negative gearing are viable investment strategies with different advantages and disadvantages. We will provide a comparison of using positive vs negative gearing to invest in property and analyse when you could effectively use each as part of your financial plan.

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Defining Positive vs Negative Gearing

Positive and negative gearing are different aspects of the same concept, borrowing money to make an investment. In brief, positive gearing is when rental income exceeds total costs and negative gearing occurs when rent is less than total costs.

Example of negative gearing vs positive gearing

Imagine you have invested in a property with a rental income of $30,000 a year. Interest payments, maintenance fees, council rates, utilities, insurance premiums, and other costs come to $35,000 leaving you with a net loss of $5,000. This would be an example of a negatively geared property.

Positive gearing works similarly. Using the same fees from above but now the rental income is $40,000 a year. Subtracting expenses from income leaves you with a gain of $5,000. This is an example of positive gearing.

For a detailed overview of positive and negative gearing, please see what is positive gearing and what is negative gearing.

Differences in Positive vs Negative Gearing

In negative gearing vs positive gearing comparisons, cash flow is an important consideration. In a negatively geared property, shortfalls will need to be paid out of pocket. Often the goal of owning property is to make profits in the future or to see a rise in value over time so a capital gain can be made when the property is sold. Herein lies the risk of holding a negatively geared property, you will be paying out monthly but the long term profitability of the property may be worth the risk. A positively geared property will immediately begin to create extra cash flow that can be used as the investor wishes but it is taxable income.

Positive and negative gearing tax implications

Income generated from a positively geared property is taxed by the ATO, however, there are deductions you can make to ease your tax burden. Losses created from a negatively geared property can be claimed to reduce your taxable income but if sold for a profit the sale will trigger capital gains tax.

Earnings

Positively geared properties will create ongoing profits and if sold, presuming it sells for more than its original price, a capital gain. Negatively geared properties only have the potential for a capital gain, presuming the sale is more than the original price.

Availability

Negatively geared properties are more common and can be found easily in major cities and towns. However, the loan repayments are likely to be larger due to higher property prices. Positively geared properties are more difficult to locate and can be in areas where rent is high compared to property values. Additionally, capital gains may be difficult to reach due to slower growth rates in the area surrounding the property.