Negative Gearing vs Positive Gearing: What Investors Need to Know

When it comes to property investment in Australia, understanding the distinction between negative gearing and positive gearing is crucial. These property investment strategies can significantly impact your financial outcomes and long-term investment success. In this blog, we’ll break down the key differences, explore the pros and cons of each approach, and help you decide which strategy might best align with your circumstances and investment goals.

What is Negative Gearing?

So how does negative gearing work? Negative gearing refers to a property investment strategy where the costs of owning a property—such as mortgage repayments, maintenance expenses, and property management fees—exceed the rental income earned from the property. Essentially, the property operates at a loss, but this loss can be offset against your taxable income, reducing your overall tax liability.

For instance, if your rental property generates $20,000 annually in rent but incurs $25,000 in expenses, the $5,000 loss can be claimed as a tax deduction. This makes negative gearing in Australia particularly appealing, as the tax benefits of this approach are widely recognised.

While negative gearing offers significant tax advantages and the potential for capital growth, it also requires investors to manage cash flow shortfalls and relies heavily on the property’s value increasing over time.

What is Positive Gearing?

Positive gearing, on the other hand, occurs when a property generates more rental income than the expenses required to own it. This means the property operates at a profit, contributing to your income rather than reducing it.

For example, if your property earns $25,000 in rent and costs $20,000 annually, the $5,000 surplus is added to your taxable income. This approach provides immediate cash flow benefits and lowers financial risk, as you’re not reliant on capital growth to make the property financially viable.

However, positively geared properties often come with higher tax obligations on the profits and are typically located in areas with slower growth potential.

Negative Gearing vs Positive Gearing: Choosing the Right Strategy

Choosing between negative and positive gearing depends on your financial situation, investment goals, and risk tolerance.

Investors often opt for negative gearing if they have a high taxable income and can comfortably cover cash flow shortfalls. This strategy is typically favoured in high-growth markets, where the property’s value is expected to appreciate significantly over time.

Conversely, positive gearing is ideal for investors seeking immediate cash flow and lower financial risk. It’s particularly suitable for those looking to diversify their portfolio with properties in regional or lower-demand areas, where rental yields are often higher relative to property costs.

Which Approach is Right for You?

Ultimately, the decision between negative and positive gearing comes down to your unique circumstances, such as your current income level, tax obligations, and investment horizon.

At McGrath Aspley, we understand that every investor’s journey is different. Whether you’re looking for guidance on choosing the right strategy or expert support with property management in Aspley, our experienced team is here to help. Contact McGrath Aspley today to discuss your property investment needs.