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Negatively geared investments are sometimes considered more stable and less risky than positively geared investments, but only if you can afford to ride the downturns in the market and hold out for an upturn to sell at a (vital) profit. The bottom line is that making money incurs tax, so positive geared investments won’t allow you to offset your overall tax payments, but unlike negatively geared investments you aren’t left waiting anxiously for a capital appreciation on your investment.
Positive gearing vs negative gearing
For shares, positive gearing can allow the investor to use dividends to cover interest accumulated and use what is left over to reduce the overall borrowed amount. In terms of property, negatively geared investments offer a less attractive return when selling at a later date, as losses have to be subtracted from the sale figure. Positively geared investments (generating an income throughout the life of the investment term) do not require the same subtractions as they are generating a regular profit. Essentially, with property, a positively geared investment will cost less to own than the amount of regular rent being received. Having more money available for investment to begin with (which decreases the need to borrow) makes the interest rate (and the overall amount owed) more manageable and therefore easier to cover with rental income. Negatively geared properties comprise a vast majority of borrowed funds with minimum initial financial input from the investor, resulting in much higher interest rates that are difficult (if not impossible) to cover by rental income alone.
Sometimes negatively geared investments are taken on by property investors as a result of them being misled by advisors or the property seller. With the prospect of owning property being such a strong pull factor (given the potential for making money with a sound investment property), some people find themselves entering hastily into an investment that is eventually more a hindrance than a step up, despite the opportunity consequently arising to offset income loss, which is sometimes one of negative gearing’s main attractions. If a property is negatively geared, investors are allowed by the Australian Taxation Office (ATO) to offset income loss against all other income. Despite these instant tax benefits, and the potential for long-term capital appreciation gains, it is more difficult to ensure a profit from a property that continually runs at a loss.
Particularly in terms of property, negative gearing can be a way to marginally reduce income but get on the property ladder. Positive gearing, conversely is a way to earn money immediately from an investment without relying solely on capital gains, which is still also a possibility. Ultimately, the downside of positively geared investments is the requirement to pay tax, rather than the ability to offset tax, but if paying tax on a positively geared investment still results in a profit each year (with the prospect of a profit from the sale of the investment still intact), such a situation would no doubt be more attractive than offsetting a negatively geared investment at a continual loss, whilst hoping for a return from an uncertain and intangible future capital gains appreciation.
