What is negative gearing in real estate

Difference between negative and positive gear

Negative vs Positive Gearing

Negative and positive gearing are terms associated with investing in real estate in Australia that help save taxes as required by law. Although there are marked differences between the two concepts, people find them confusing. This article tries to simplify the two terms so that property owners can save on taxes.

Negative gear

If the total cost of maintaining a property acquired with the help of borrowed funds exceeds the total income from the property, the property is considered to be negatively oriented. Because such a property incurs losses, these losses must be offset against other income such as income from salaries or business income. This causes net income to drop and helps a person lower the tax payable or get bigger tax refunds when filing income tax returns.

Positive gear

This is a concept that is completely opposite to the negative gear. Here, the total income from the maintenance of a property, which was acquired by taking out an interest loan, is higher than the total costs for the maintenance of the property. As a result, the person's net income increases and they pay more taxes on the income.

It is a fact that the concept of negative gearing is more popular with property owners. This is because they currently have less tax to pay, which effectively increases the return on investment. If you look at how properties have fared for homeowners, it becomes clear that an overwhelming majority of homeowners are taking advantage of negative gearing as they report losses on their properties on loan.

Shortly:

Negative and positive gear

• Negative gearing is good for those in the highest income bracket. The loss of purchased property means it can be offset against other income and you will have to pay lower taxes. This approach assumes that the losses reported on the property will be offset as the property increases in value.

• However, positive gearing doesn't hurt (rents are higher than spending) as positive cash flow can be used to invest in more real estate.