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Gearing

June 8th, 2015 by Geoff Baldwin

When investors use the term “gearing” they are usually referring to their degree of borrowing against their overall equity and how much income they are receiving from their portfolio compared to the amount they are paying out.

You are considered to be positively geared when your rental income exceeds your total out-goings but it is worth keeping in mind that you will pay tax on the excess income.

You are considered to be neutrally geared when your income covers your out-goings without profit or loss. In this situation you would pay no tax on the rental income but would very likely be entitled to a tax credit for depreciation on the chattels and possibly the construction.

The term that you are more likely to be familiar with is Negative Gearing. This refers to the situation where your rental income is less than your total outgoings. This shortfall is a tax claim for you and Negative Gearing is popular with many investors because it effectively means that you can use money that would normally be paid to the ATO, to support your property investment portfolio.