benefits of positive gearing?

  1. 3,047 Posts.
    lightbulb Created with Sketch. 1
    Positive Gearing

    A positive geared investment is an investment that provides an increase in wealth after tax has been paid. Positive cashflow is a good start, but it is possible to turn a neutral (or even slightly negative) cashflow investment into a positive geared investment by claiming non-cash deductions. Positive geared investments are superior to negative geared investments by a long shot. Positive geared (or positive cashflow) investments add to your weekly income. This extra income helps you buy more investments. The more investments you buy the higher your income. Your investments are not dependent on your wage. Eventually, your investment income will become larger than your wage income. You can then choose to stop working. There are no nasty tax shocks when you sell the investment. It is truly a wealth creation strategy. In the following lessons you will learn how to identify and create positively geared investment opportunities.

    Remember that the difference between gearing and cashflow is that cashflow is profitability without considering tax deductions, and gearing is profitability taking into account tax deductions. An investment may be one of three types:

    1. cashflow positive & positive geared
    2. negative or neutral cashflow and positive geared
    3. cashflow negative and negative geared

    It is impossible for an investment to be cashflow positive and negative geared, because you cannot claim deductions on a profit. You can choose to claim depreciation which may turn a neutral or slightly positive geared property into a negative geared property, but this will simply defer tax, not save it.

    “But wait!” cry the negative gear advocates. “You don’t understand! Eventually you will have large capital gains.” That’s right, you will, maybe not till 5 or 10 years later, and not in the way you would think. Since the property has been running at a loss, depreciation costs will have been claimed, to maximise the tax refund given. On a $200,000 property, this might be $4,000 a year for 10 years. This depreciation reduces the capital base to $160,000 ($200,000 – 10 x $4,000), and when the unsuspecting owner finally sells for $250,000, thinking their $200,000 property has made a $50,000 profit, they are in for a rude shock when the tax bill arrives. Rather than paying tax on $50,000 profit, they will be hit with a tax bill for a liability of $90,000 ($250,000 - $160,000), because the property value has been written down and the profit on paper is a lot higher. We are in a low inflation environment so don’t count on indexing to save you either. Oops! Didn’t hear that part in the property seminar?

    Does negative gearing make money or lose money?
    Does it help you reach financial independence or make you work more hours?
    Does it help you build your portfolio or limit how many investments you can have?
    Does it contain hidden tax traps?
    Is it a wealth creation strategy or a wealth reduction strategy?
 
arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.