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Firstly, negative gearing only applies if you are renting out your property.
Negative gearing is when your investment costs are higher than your rental income, which you claim in your tax to reduce your taxable income.
You can think of negative gearing as a tool for reducing your losses.
When property investors own several properties, all of them negatively geared, they can pool their losses and reduce their assessable income accordingly.
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So property investment can be viewed from two perspectives:
- investment property as part of a wealth strategy, using cash-flow positive properties to cover the mortgage repayments so a portfolio of properties can be built;
- investment property as tax planning for high income earners, who use negatively geared properties to reduce their tax bracket; they might end up with a capital gain when they sell the property, or hold the property and eventually make it cash-flow positive.
Positive gearing is where the income your property produces is greater than the ongoing costs, including loan repayments.
The question of whether to own investment properties that are cash-flow positive or that are negatively geared is one of personal taste.
I definitely lean towards cash-flow positive. I believe that a good business is one that makes more money than it spends, and so that’s how I like to do it.