With all the talk of tax and household budgets, negative gearing is currently getting a lot of air time. On the flip side, not a whole lot of attention has been given to positive gearing and what this can bring to your bottom line.
Generally speaking, the status quo errs on the side of caution by negatively gearing their investments in order to reduce their tax bill. When it comes to purchasing an investment property, the question you should be asking yourself is whether you want to generate a constant return or a deduction.
Many happy returns
It’s a commonly held perspective that the main disadvantage of positive gearing is the reality of a higher tax bill. This is due to the fact that you’ll be earning an income from your investment, but that’s not necessarily a bad thing. Any investment decisions you make should be firmly focused on generating the greatest returns possible, not on minimising tax.
While there’s nothing wrong with prioritising a tinier tax bill, it can prove a short-sighted game plan. By positively gearing your property, you’re generating a constant return instead of covering a shortfall, which could put you ahead in the long run. Because you’re making a profit from day one, this will give you a higher income to either save for your next investment or pay down your principal.
Keep in mind a simple scenario: If you spend a dollar and the taxman gives you 30 cents back, this is negative gearing. If you make a dollar and give the taxman 30 cents, this is positive gearing. The question is – do you want 70 cents in your pocket or a 30 cent tax deduction at the end of the year?
If you’ve already bought a property and you’re currently negatively gearing it, there’s room to change tack. With a few simple shifts, it’s possible to transition from negative to positive. You have the option to add value by renovating or increasing rents, allowing you to pay off your loan faster. However, the quickest way to transition to positive gearing is by reducing your loan balance with a capital injection.
If you’re worried about the tax implications of positively gearing, involve your financial advisors early in the process. This way, they can help you structure your investment to best fit your situation.
A plan of attack
There’s a myriad of ways you can approach your investment, but before taking the property plunge, make the time to clearly outline your objectives with a distinct path to achieving them.
Essentially, investing in property is about planning for a more secure future, so if you’re looking to get the most out of your investment, it’s worth considering how positive gearing could help you get there faster.