9
TAXATION - positive vs negative
gearing
Even with an uncertain economy, rental yields
are still expected to continue to increase in
most capital cities.
As the population in these cities continues to
grow, demand for housing will also increase.
To date this increase in demand has not been
satisfied with an increased supply of housing,
resulting in
a shortage of housing stock.
Falling vacancy rates and higher rents have
made it more difficult and expensive to find
rental accommodation.
Like all good investments you first need to
consider the property to be purchased. As
with all property investments, location is the
key consideration.
Once you have researched your investment
property, you will need to decide on the
gearing strategy that best suits you. This will
be determined by:
• your financial circumstances,
• retirement strategy,
• the level of your deposit, equity available,
• surplus monthly cash flow (income less
expenses), and
• your acceptable level of risk.
FACTORS TO CONSIDER WHEN PURCHASING
RESIDENTIAL INVESTMENT PROPERTY
These considerations will clarify whether
negative gearing or positive gearing strategies
are most appropriate to your situation.
Should you have positively or negatively
geared property investments?
Here’s a brief description of both gearing
strategies to help you identify with the
possibilities of each.
Positively geared properties
are when
the rental return is higher than your loan
repayments and outgoings. Positive cash flow
properties are self funding and are considered
to be a conservative investment strategy that
provides an income with exposure to the
prospect of capital growth.
Bear in mind that with positive gearing there
is the potential that tax will be payable on
the net income (after the consideration of
depreciation and other tax deductions).
Positive gearing is beneficial when an
individual does not have surplus cash flow
to fund income losses during the ownership
period or other income to offset losses.
Negatively geared properties
are when the
rental return is less than your loan repayments
and outgoings (placing you in an income loss
position). There is however the underlying
expectation that the accumulated losses will
be more than offset by the capital growth on
the property. In this circumstance the rental
return is not considered as important in the
decision process.
The key benefit associated with negative
gearing is that
the loss associated with
the property ownership can be offset
against other income earned,
reducing your
assessable tax income, thereby reducing your
tax payable.
Properties located within 20kms
of the CBD with good train, bus
and freeway access will offer
stronger returns.
