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Positive or negative gearing: What’s better in today’s market?

Positive or negative gearing: What’s better in today’s market?

15 July, 2022

Could you please explain the difference between positive and negative gearing, and when each one is more suitable? We are looking at buying a property for our son to rent from us on the Gold Coast, due to the high rents there. He has a disability, so this would be a long-term plan. We own our home after downsizing and have a large sum of cash in the bank doing almost nothing, but not enough to buy a property for him outright. We are in our early 50s and both work full-time, although one of our positions is casual. Should we use all our money for the rental property purchase deposit, or just what we need to, and put what is left into superannuation? We prefer not to obtain a loan using our home as equity, as this feels unsafe.

The word “gearing” means to borrow. A property is positively geared when the net income exceeds the total outgoings, and is negatively geared if the income is less than the expenses.

If you intend to rent the unit to a family member – and still intend to claim normal tax deductions that a rental property provides – the rent would need to be at “fair market” price. It need not be high rent: It can be discounted a little because of the strength of the tenant.

The best way to finance it may be to put up a deposit large enough that the rent covers the outgoings. The property would then be “neutral” geared.

There would still be some tax deductions available because outgoings, such as depreciation, are tax-deductible but do not require a cash outlay.

I assume you will leave the property to your son when you die.

I am aged 62 and earning $90,000 a year. I have recently sold my home to downsize and want to direct the surplus cash of $330,000 into my superannuation fund as a non-concessional contribution. My question is, do I wait for better (sharemarket) conditions and direct the cash into a low-interest bearing account in the meantime?

It is almost impossible to judge when it is best to enter or exit the sharemarket. The problem is that when a market bounce happens after a downturn – like we have now – it often happens quickly, and you won’t have time to get in then.

You may have 30 years of living ahead of you, so can afford take a long-term investment view.

One option may be to use the dollar-cost averaging strategy: Invest a set sum of money into the same asset class each month.

For example, you could contribute the entire sum of the surplus from your downsizing into your super fund’s cash area, and then transfer, say, $30,000 to the “balanced” investment option each month. This would smooth returns, but still leaves you open to missing a substantial bounce if the market recovery occurs more suddenly.

I am aged 63 and my partner is 61. I have had only small periods of paid employment during my lifetime, as we frequently lived in countries where I could not work. When I did work here, the management fees for compulsory super soon chewed up the balance. Now, we are coming up for retirement and about to sell our family home, which has been rented for the past 15 years. Can I open a new super fund and contribute a lump sum after the sale of the property? I would like some security, apart from sharing my partner’s modest super.

You can contribute up to $330,000 each after the property sale using the bring-forward rule and, in three years, contribute another $330,000 each – if you have the funds available.

Anybody can contribute to age 67 – non-concessional contributions can be made until age 75 after June 30.

Once your super balance exceeds $1.7 million, no more non-concessional contributions can be made.

There may be capital gains tax (CGT) liability on the sale of the house. It would be best to speak with a financial adviser, as it may be possible for you both to contribute to super using catch-up contributions, and so alleviate some tax.

I live in my Sydney home and have a rental property in Brisbane. My home needs major renovation. If I move to Brisbane and live there for 2-5 years and then sell it and move back to Sydney, would I have to pay CGT on the sale of the Brisbane property?

Changing main residences does not eliminate CGT. I would just reduce it in line with the proportion of time you cover it with your main residence exemption.

For example, if you have owned the Brisbane rental for 10 years, and you live there for five years, then two-thirds of the capital gain would be taxable.

Be aware that if you move your main residence exemption to Brisbane, then you would then be exposing your Sydney home to potential CGT.

Make sure you liaise with an accountant every step of the way. You do not have to elect which of the two properties would be covered by the main residence exemption until you sell one.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.