When it comes to property investment strategies, positive gearing is considered one of the more conservative investment strategies, with most investors rather leaning towards negative gearing.
According to the Australian Taxation Office (ATO), around 30% of Australians own an investment property with 40% of those being neutrally or positively geared. That means that 60% of investment properties are negatively geared.
But is negative gearing the right investment strategy for you?
It helps to weigh up all your options, and depending on your circumstances, you may want to consider positive gearing as a strategy.
To equip you with all you need to know about positive gearing, we’ve drafted this article to cover all the positive gearing bases including what it is, the tax consequences as well as the pros and cons.
Put simply; gearing means that you used a home loan to buy your investment property.
Having a positively geared property means that your investment property rental return is higher than your home loan repayments and other property costs.
In other words, you are consistently making a profit from your investment property, and you could use the surplus income to reduce the size of your home loan, for example.
Bruce purchased his first investment property in Melbourne for $485,000 in a suburb just outside the city.
Bruce manages to rent out the apartment for a strong rental return of $575 per week.
Assuming that the property costs he incurs from owning the property amount to $460 per week, Bruce can cover the expenses with the rental return and have a surplus of $115 per week:
$575 - $460 = $115
This means that Bruce’s property is positively geared.
As with any investment strategy, you must weigh up the possible advantages and disadvantages of positive gearing - especially in relation to your current financial circumstances and future financial goals.
Some of the potential advantages of positive gearing your property include:
Just like the income you receive from your wages, the income you generate from your investment property is subject to tax.
You’ll pay tax depending on your income tax bracket. You can access the income tax rates on the ATO’s website.
The key benefit associated with a negatively geared investment is that you can offset the loss from your income. In other words, you’ll deduct the loss from your assessable income, resulting in a reduced taxable income.
However, there are various beneficial tax deductions that you can claim on your positively geared property that can also reduce your taxable income. So, by claiming all your investment property tax deductions, you can reduce the amount of income tax you pay each year.
The top three investment property tax deductions include:
To access a full list of tax deductions, you can claim, make sure to check out our ultimate guide on investment property tax deductions.
While there are many advantages to buying and opting for a positive gearing strategy, there are some other factors you should take into account:
It all comes down to planning and keeping up to date with economic and property market fluctuations. That’s why we emphasise building a team of property investors and other property professionals to help you navigate through making the right decision for you and your circumstances.
Opting for a positive gearing strategy means that you aim to have a higher rental return than your loan repayments and other expenses.
While it’s harder to find positively geared properties and you’re likely to pay higher income tax, there are ways in which you can find the right property for your circumstances and reduce the amount of tax you have to pay:
Seeing the full potential of all the tax breaks available to you could be the difference between you hoping to earn enough money from your investment property and having positively geared property.
One of the most significant tax deductions you can claim is depreciation and depreciation schedules are one of the most effective tools to maximise your returns.
As a team of avid property investors ourselves, we, at Duo Tax, understand that every dollar counts. We’ve got the expertise to help you maximise the return on your investment.
To see how our quantity surveyors can help you, get in touch today!