What is the difference between positive and negative gearing?
In Australian property investment, gearing refers to the borrowing of funds to purchase property. Two primary strategies—positive and negative gearing—offer different financial implications and benefits for investors.
What is Positive Gearing?
Positive gearing occurs when the income generated from the investment property exceeds the costs associated with owning it, such as mortgage repayments, maintenance, and management fees. In this scenario, the investor enjoys a surplus, leading to an immediate profit.
The key benefits
1. Immediate income - investors receive a steady cash flow, enhancing financial stability.
2. Lower risk - the property is self-sustaining, reducing the need for out-of-pocket expenses.
3. Loan servicing - easier to manage mortgage repayments and potentially qualify for further investments.
What is Negative Gearing?
Negative gearing is when the costs of owning the investment property surpass the income it generates, resulting in a net loss. Investors typically rely on tax deductions to offset these losses, aiming for long-term capital growth.
The key benefits
1. Tax deductions - investors can claim losses against their taxable income, reducing their overall tax liability.
2. Capital growth - the strategy is often employed with the expectation that the property will appreciate significantly over time, yielding substantial profits upon sale.
3. Portfolio diversification - allows investors to diversify and potentially enter more lucrative markets.
Both positive and negative gearing offer unique advantages, catering to different investment goals and risk appetites. Understanding these strategies can help investors make informed decisions aligned with their financial objectives.
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