An investment can either by positively or negatively geared. A negatively gearing situation will most commonly occur when an investor borrows money to purchase an investment property.It is common for a property to be negatively geared when there are high interest and depreciation charges.
When an investment is negatively geared during the financial year your expenses are larger than the income received on the investment. This works for your tax return in Australia where the loss you have made for that year on your investment is taken off your taxable income – therefore reducing your tax liability. Commonly your occupation will withhold tax from you according to what you earn. So a reduction in your taxable income will reduce your tax liability and give you a refund of tax as too much has been withheld. However for certain levies and offsets the loss is added back onto your taxable income to increase it.
Therefore if the investment is negatively geared you will need to be able to fund the shortfall of expenses over income out of your own pocket during the life of the investment. Negative gearing only becomes a profitable undertaking when the property is eventually sold resulting in a large capital gain (therefore the property must increase in value).
An investment that is positively geared is when the income earned is more than the associated expenses. This amount for the financial year is added onto your taxable income and tax will have to be paid at your marginal rates.
Each method has advantages and disadvantages of its own, what is right for an investor depends on their circumstances.
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