All investors would have heard of the terms positive and negative gearing but very few would understand exactly what they mean or which one is best.
Positive gearing means that the income the property receives is greater than the cost to hold the investment property. Therefore, the investor would be making money.
Negative gearing is obviously the opposite, meaning that the cost of holding the investment property is greater than the rent the property receives.
The pros of positive gearing is that you are making a profit each week from holding the investment property. But at the end of the financial year you will need to add the amount you have gained from the investment onto your taxable income, possibly pushing you into the next tax bracket, meaning that you will be paying more tax.
The pros of negative gearing is that even though you are having to put money into the investment property each week, at the end of the financial year the amount that you have lost can be offset against your taxable income. Meaning you will not pay as much tax.
There is no right or wrong option, nor is one the best option for everyone. It is recommended that you speak to a professional for advice on which option is best for you, depending on your circumstance.
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