Do you intend to purchase your first home? If so, you may be wondering what all the fuss is about with regard to "gearing," which is simply the amount of debt you take on in order to purchase an investment property. Moreover, gearing comes in three flavours: negative, neutral, and positive.
In this article, we will discuss the difference between negative, neutral, and positive gearing. You will also know which type of gearing would be best for you. So, keep reading to find out more!
If a property is negatively geared, it has inherent tax benefits, as you can claim deductions exceeding the rental income you receive, meaning there's an overall tax loss. The key benefit here comes from a reduced taxable income and potentially lower tax rate, allowing investors to pay less taxes and pocket more of their money each year!
Negative gearing is an incredibly common investment strategy for Australians looking to make more money from their rental properties. These are some of the advantages of negative gearing:
Negative gearing is an attractive opportunity for property investors, allowing them to offset the investment costs against their taxable income. However, it's important to consider the disadvantages too.
Neutral gearing allows taxpayers to bring in an equal amount of income and expenses, meaning their overall income will not be affected. This kind of financial strategy is beneficial for those who have investments and want to take advantage of both income and expense flows at the same time.
Ultimately, neutral gearing can help maximize long-term savings potential, yet it is wise to consider all the possible risks that come with this kind of financial strategy.
A positively geared property is a great financial choice to have. In this situation, the rental income will be greater than the expenses that can be claimed, which leads to the taxable amount being favourable for the taxpayer. This means there is a surplus between what was earned and what it cost to earn it, allowing for extra profits.
Positively geared properties are great investments because they create a consistent flow of income without any detractions from your wallet. However, when deciding on such an investment, careful planning should be taken into account by calculating all costs and likely rental yields, as well as legal advice from qualified staff before signing on the dotted line.
Positive gearing is a popular choice for investors as it can have many financial benefits. These are the advantages of positive gear:
Positive gearing can be an attractive investment strategy. Although, it's essential to consider the potential disadvantages before jumping in.
Deciding which type of gearing is the best for your financial situation depends on several factors. Negative gearing means you are borrowing more money than investing in something. Neutral gearing involves an equal exchange of funds borrowed and invested. Positive gearing means that you are investing more money than you are borrowing.
Each type carries certain risks and rewards, so it's essential to research each option before deciding which is best for you. Ultimately, the best advice is to consult a financial advisor who can provide tailored advice based on your circumstances.
In summary, negative, neutral, and positive gearing are all ways to use debt to finance an asset. Each type of gearing has its benefits and drawbacks that should be considered before deciding.
If you need help determining which type of gearing is best for your situation, our team at Unicorn Finance is happy to help. Contact us today for a free consultation!