What is Positive Gearing?
First a note on positive gearing.
Positive gearing is where a loan has been taken to purchase an investment property, then the rent from this property is greater than all its expenses (usually incorporating interest and your running expenses; the managing agent, letting fees, insurances, maintenance, etc.).
So, an investment property that is positively geared is one where borrowing has been used to purchase the investment and the rent is more than all expenses.
In many cases, after borrowing everything (i.e., not putting cash in - getting deposit and costs from established equity and borrowing the other 80% on the investment property) to purchase an investment property, when the rent is received and all expenses have been paid (such as the interest, and all the running costs, including maintenance, insurances and management, etc.), there is a shortfall. This shortfall between income and expenses (known as negative gearing) is tax deductible.
Plus, most of the properties sourced tend to be new properties, providing maximum tax benefits from building depreciation. Depreciation on new dwellings provides the ability to write off the entire building costs at 2.5% fixed for 40 years.
Since it is a new property, there are about $25,000 to $30,000 worth of new fixtures and fittings. These fixtures and fittings provide diminishing value depreciation and good deductions for about 10 years. Then, unlike the building, it is written off because it is diminishing value.
So, that is a cash flow positive property. By borrowing everything, receiving rent together with the allowable tax benefits, less all expenses, the investment property will be earning money each week. It is possible to get the tax benefits in your regular wage, there is no need to wait to the end of the financial year.
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