Positively geared properties are when the rental return is higher than your interest repayments and outgoings. Negatively geared properties are when the rental return – the amount of rent you receive from your tenants – is less than your interest repayments and outgoings, placing you in a position of losing income.
Neutral gearing is where you earn the same amount from your investment as you pay in interest and other costs, such as rates, insurance and renovation work.
The key benefit associated with negative gearing is that the loss associated with the property ownership may be offset against other income earned, such as your salary, reducing your taxable income and therefore your tax payable.
The result is that the cost of owning the property is being funded by your tenant in the form of rent, by the Australian Tax Office in the form of tax savings, and by your other surplus cash flow, such as your savings and other forms of income.
In certain circumstances, the savings through tax deductions on this loss can exceed the losses realised from the property. It’s important to remember, however, that every situation will be different due to personal circumstances.