HI,
We are relatively new to investing and I have just come across this very informative website. We currently have a property which we negatively gear and are just coming into a situation where we can purchase another property. I noticed that there is a lot of talk about positive gearing, a subject which I know very little about. Can somebody give me a brief comparison between the two? Is there a book or a site which explains the differences and advantages/disadvantages on doing this? Does postive gearing have tax implications?
Cheers
NicoleK
Check out my website….
There is a section that briefly explains the essence of it….
Don't forget the third strategy; positive cashflow AFTER TAX.
I have talked about this numerous times on this forum; briefly it means that your property has a positive cashflow after you incorporate your tax return. So the profit is tax fee, unlike positive gearing where you pay tax on the profit.
There is nothing wrong with positive gearing; no-one ever went broke making a profit, but in today's market, with positive gearing all but impossible to find, the pos cashflow option is an attractive alternative to neg gearing or neg cashflow.
Selecting the correct property to achieve this is critical; I suggest you read about the strategy in any (or all) of the books written by Margaret Lomas.The whole positive cashflow after tax idea many people seem to believe that you are saving tax.
YOU ARE NOT SAVING TAX, YOU ARE DEFFERING IT.There is an example in Steve's first book which I am re-reading right now, where you buy a property for 190K and you depriciate it at $6,700 a year for 5 years. This produces +ve CF(turns -ve to +ve). NOw in this tiem the property have increased to 240K, so you think you have made a 50K profit. well you bought your property for 190K but you have written off $6,700 a year on tax making the overall written down value at the end(190K-33.5K) $156,500. So you now have to pay tax on the difference between the 240K and the now written down value. Most people that can turn the -ve into a +ve by the tax defferal idea would have a high tax rate, so your CGT would be high and your profit from CG would be much smaller than you originally thought.
So the idea that I am trying to get across that Steve got across to me it that YOU ARE NOT SAVING TAX, ONLY DEFFERING IT.
You have to pay it later, *paying the tax later* may be the only advantage of claiming it and having +ve cashflow for that time(though a measly CG at the end).Chris.
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