What is negative gearing?
Negative gearing sounds complicated, but unlike all the other terms and jargon in the property game it’s pretty straight forward. Negative gearing applies to rental properties as it concerns the money received in rent versus all the outgoings the owner pays. Quite simply, if you pay more in outgoings then you receive in rent for a property, it is negatively geared. As the rent doesn’t pay all the bills you have to supplement the outgoings with your own income, so you’re out of pocket each month.
This may sound terrible, but savvy property investors know that getting into the property market isn’t just about quick wins. It’s about playing the long game and eventually owning a property for very little cost.
What are the tax implications of negative gearing?
Negative gearing has it perks at tax time as the shortfall between the income and outgoings is a financial loss. This means that you’re able to claim deductions on this amount, reducing the tax payable on your income. You don’t even have to wait until tax time to claim your tax back as PAYG Withholding Variation can be applied each month to reduce the amount of tax you pay.
So what is positive gearing?
Positive gearing is the standard rental model where you make more from rental income than you pay in outgoings. This means that you are turning a profit each month on your investment. You may have one positively geared property on the side and still work full time, or your property portfolio may generate enough income for you to live on.
What are the tax implications of positive gearing?
Any income you make is taxable, and this is certainly true for any extra cash made from property investments. You need to be aware of your income level when the tax year rolls around to avoid any unexpected bills.