Gearing - The Optimum Mortgage Service

For people who either have money to invest and/or equity in their own home or another property, negative or positive gearing is an investment option. Both gearings involve the purchase of an investment property, the only difference being the net financial result at the end of the financial year.

To establish whether a property will be positive or negatively geared, the potential borrower must calculate the overall expenses and income from the investment property throughout the financial year. If the expenses exceed the income, then there will be a negative gearing and thus a tax advantage. If the income exceeds the expenses then the tax situation is reversed. Some properties could vary from year to year.

Types of expenses that the investment property may incur are:

Interest on the loan amount

Water and land rates

Repairs and maintenance

Insurance

Body corporate or strata levies

Managing Agents fees

Bank fees and charges

Solicitors fees

Depreciation

Income is usually limited to the rent received.

Negative gearing can provide good tax advantages. But this will only occur with the right property and financial advice.

Another aspect to consider is whose name will the investment property be registered under? Often one spouse earns more that the other, therefore it is more beneficial for the investment property to be purchased solely in the name of the highest income earner. Therefore this spouse will earn the rent as additional income, and will claim the expenses in their name. Hence the higher earner gets the full benefit of "negative gearing".

In some cases you may want to split the ownership 60/40 or 90/10, again to take full advantage of the tax benefits. However, this may not always be possible depending on the lender that your loan is going through, as not all lenders will allow an uneven split. Your consultant will advise which lenders will suit your needs.

Also if one spouse is close to retirement, it may be more prudent for the investment property to be purchased in joint names, so that they can income split the rent on retirement.

Investments in shares and bonds can also be geared.

Before investing, potential borrowers should seek the advice of their accountant or financial consultant, so that they are fully aware of the gains and risks. A borrower needs to consider if they are able to fund the expenses on the property if there is no income from the property for a time.