Investment property is a business and in any business there a tax that you need to pay on your income. In investment property, you generate money from the rent you get from your tenants and you have to pay tax on this rental income.
Positive gearing is where the annual income is higher than your overall costs. The costs will include loan repayment, property maintenance costs and any other expenses related to the property.
Pros: you will get regular income, a positive cash flow which can help you cover your day to day expenses or you can save and invest the money in some other project.
Cons: this income is taxable. Also, there will be a capital gain tax when you sell the property.
Negative gearing is where the annual income is lower than your overall costs. This approach assumes that the property that you bought now will increase in value over the time so you can get an equity or profit in future this increase will outweigh the losses that you have made.
Pros: Biggest benefit is that you can save some tax on your other incomes. If you are in high tax bracket and paying a lot of tax, negatively geared property can save some tax for you.
Any expenses that is connected with this property such as maintenance costs, property manager’s fee and even the interest paid on loan repayments can be claimed.
Cons: you have to pay some money from your packet every week. You can claim the expenses and get them back but that is at the end of financial year not every week.
However, it is best to contact your accountant as there is a special scheme where you can get some claim back every week. It is best to consult an accountant to discuss this further.
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