If you’re considering investing in property, understanding the difference between positive and negative gearing is crucial. Gearing refers to the financial strategy of borrowing money to invest in property, with the potential to build wealth over time. The terms positive and negative gearing for investors defines whether the income generated by your investment exceeds or falls short of the property expenses.
At FMS Group, we often encounter clients who want to explore property investment but are unsure how gearing works and which approach might suit their financial situation. In this blog, we’ll break down the difference between positive and negative gearing, explain how each strategy works, and discuss some important considerations for local investors.
What Is Positive Gearing?
Positive gearing occurs when the income you earn from your investment property is greater than the total costs of owning it. These costs include mortgage repayments, interest, property management fees, and maintenance expenses.
With positive gearing, you’re making a profit each year as your rental income exceeds your expenses. This strategy can provide a steady income stream and help cover your property-related costs while increasing your overall cash flow.
Benefits of Positive Gearing:
- Regular Income: Positive gearing offers immediate income, which can be used to pay off other expenses, invest in more property, or boost your savings.
- Increased Borrowing Capacity: Since you’re generating additional income, lenders may view you more favourably, potentially increasing your ability to borrow for future investments.
- Less Financial Stress: With your property generating a profit, you won’t need to dip into your savings to cover property expenses.
Considerations:
- Taxation: Since you’re earning income from the property, you’ll need to pay tax on your rental earnings. The more income you generate, the more tax you’ll need to pay, based on your marginal tax rate.
- Capital Growth: Positively geared properties are often located in regional areas or suburbs where property prices might not increase as quickly as in urban areas, like parts of Sydney’s North Shore.
What Is Negative Gearing?
Negative gearing is the opposite – it occurs when the income from your investment property is less than the property’s expenses. This means you’re making a loss each year, as your rental income doesn’t cover all your costs.
While negative gearing might not sound appealing, many investors use it as a long-term strategy to capitalise on potential tax benefits and future property value growth.
Benefits of Negative Gearing:
- Tax Deductions: One of the key advantages of negative gearing is that the losses you incur from your property can be claimed as tax deductions, reducing your overall taxable income. This is particularly attractive for high-income earners.
- Potential for Long-Term Capital Growth: Investors typically choose negatively geared properties in high-demand areas, like Sydney’s North Shore, where property values are likely to increase over time. While the rental income may not cover costs initially, the property’s long-term appreciation can potentially generate significant profits when sold.
- Offsets Income Tax: For NSW investors with higher salaries, negative gearing can help offset income tax, as the losses reduce the amount of tax payable.
Considerations:
- Cash Flow: Since negative gearing results in a loss, you need to be able to cover the shortfall between rental income and expenses. It’s essential to have sufficient cash flow to manage these out-of-pocket costs.
- Risk of Property Depreciation: If the property’s value does not increase over time or if the market dips, you could be left holding an asset that doesn’t appreciate in value, which could reduce your long-term return on investment.
Positive vs. Negative Gearing for Investors: What’s Right for You?
Choosing between positive and negative gearing depends on your financial goals, risk tolerance, and cash flow situation.
- Positive Gearing is generally better suited to investors who want immediate cash flow and are not solely focused on long-term capital growth. It can be a more stable option, with less financial strain, as the property pays for itself and generates income. This is particularly appealing in areas on the Central Coast, where property values may not rise as rapidly as in urban locations.
- Negative Gearing, on the other hand, is often favoured by investors looking for long-term capital growth and tax benefits. This strategy requires patience and the financial capability to manage losses in the short term, but it can lead to significant capital gains in sought-after areas in Sydney.
NSW Regulations on Negative Gearing
Negative gearing is governed by national tax laws in Australia, but it’s important for NSW investors to stay informed about state-specific regulations that could impact their investments. Here are a few key points to consider:
- Land Tax: If your total landholdings (excluding your principal place of residence) exceed the land tax threshold, you may be required to pay land tax in NSW. As of 2025, the threshold is $1,075,000 for general landholders.
- Stamp Duty: When purchasing investment property in NSW, you will need to pay stamp duty, which can add a significant cost to your initial investment. NSW has recently introduced a property tax alternative for first-time buyers, offering more flexibility for those entering the property market.
The Role of FMS Group in Your Property Investment Journey
At FMS Group we provide tailored financial advice to help you make informed decisions about property investment. Whether you’re considering positive or negative gearing, we can guide you through the complexities, helping you optimise your investment strategy for long-term success.
If you’d like to learn more about how gearing can impact your financial future or if you’re ready to take the next step in your investment journey, contact us today to schedule a consultation.