Anyone approaching property investment is likely to have heard the words “positively” and “negatively geared” being spoken with alarming frequency. But what do these phrases mean? And, what are the tax implications of pursuing either property investment route?
Firstly; the definitions. To put it simply, a positively geared property is an investment property in which your weekly or monthly income exceeds your outgoings for the same period. For example, you purchase a property for $500,000, spend $300 per week on maintenance, mortgage repayment and associated costs, and rent the property out for $500 per week. Your profit is $200 per week.
A negatively geared property will not be making a short term profit. In this case, perhaps you purchase a property for $500,000, spend $420 per week on fees and costs, and rent the property for only $350 per week. In the short term, you are losing $70 every week on this property.
Cash Flow vs Capital Growth
So what does this mean in terms of tax? Well, the Tax Office looks at the two types of property investment in very different ways. Positively geared properties are viewed as cash flow properties, while negatively geared assets are viewed as capital growth.
As a positively geared property is making a weekly profit, it is generating a short term income for the owner. And, just like any other income, this will be taxed, eating into the small amount of profit made each month.
A negatively geared property is making a weekly loss, but the investor is developing their equity in the property and securing a lucrative asset for the future. There is no weekly or monthly profit to be drawn, so this cannot be taxed.
In fact, the owner of a negatively geared property will be able to claim tax deductions against any property-related expenses that they must bear. This provides a handy buffer against weekly losses and expenditure while the investor works towards their long term goal.
Positive or Negative
Deciding which course of action is the best for you really comes down to your aims for your property. If you want to see profit in the short term, adding to your disposable income quickly and effectively, a positively geared property is for you, but be aware that this income will be taxed.
If you are happy to make small short term losses as you build towards a long term goal for your property, negative gearing could help you achieve that goal. Remember, tax deductions are available to help you out, but you are playing the long game and you must stick with it to achieve success.
Your Accountant or Financial Adviser’s understanding of your personal financial situation will mean that he or she is in a great position to help you decide whether to negatively or positively gear an investment. Give them a call.