What is gearing?
Gearing is simply borrowing money to invest – in property, a business, shares or managed funds. It basically helps you boost your potential investment returns by increasing the amount of money you have available to invest.
How does it work?
Let’s say you want to invest in a rental property. You borrow most of the money to invest and hope that the value of your property increases over time so you can make a capital gain.
While you may generate rental income, you also have outgoings like interest on your loan, managing agents’ fees, council rates, strata fees, building repairs and depreciation on the value of the property.
Depending on your situation, gearing is basically the difference between the costs of owning your property and the income you can generate from it. This can go either way, negative, neutral or positive and each have different effects.
If your interest and investment costs are more than the income you receive from the property, you will have a negative cash flow–that is, you make a loss, so it is said to be negatively geared.
How can negative gearing affect my tax obligations?
You may be able to claim a tax deduction for the interest and investment costs, which may reduce the overall tax you pay on your other income.
This is when your income and expenses work out to be the same amount.
How can it affect my tax obligations?
You may be able to claim a tax deduction for the interest and investment costs against your investment income but, it’s unlikely that you’ll be able to reduce the tax you pay on your other income.
If the income you receive from your property is greater than your outgoings, you will have a positive cash flow; therefore your property is positively geared.
How can positive gearing affect my tax obligations?
You may be able to claim a tax deduction for the interest and investment costs against your investment income. However, because the income generated from your property will be greater than your outgoings, this positive difference will be subject to income tax. And while you won’t be able to reduce the tax you pay on your other income, you can use the surplus income to reduce the size of your loan.
What’s right for you?
If you’d like to know more about what type gearing suits your situation, call us on 131 267 or speak to a financial adviser.
Building projects generally are not easy to get right, so it’s important to set the right framework from the start.