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What is positive gearing on a rental property?
Positive gearing means an investment bought with borrowed money earns more than its tax-deductible costs, including interest. A rental then has net income that is taxable. People often call this cash flow positive. Yet the cash left after debt payments, tax and other bills may differ from the profit used for tax.
Updated
How is net taxable rental income worked out?
Start with rental income and take off the costs the owner is allowed to claim. The income declared is the rent before a manager takes out fees or bills. Eligible costs are then claimed on their own. You do not report just the net sum the manager sends to your bank.
The costs can include interest, management fees and eligible deductions that need no cash payment that year. They do not include paying back the principal, which is the loan debt. Each owner's share and any private use also affect the income and costs shown in their tax return.
What is the difference between positive gearing and negative gearing?
Positive gearing gives a rental profit for tax. Negative gearing gives a rental loss on an investment bought with debt. These labels are not fixed features of a property. Changes in rent, borrowing costs or deductions can turn one result into the other.
The rules that limit some rental losses from July 2027 relate to negative gearing. Positive net rental income stays taxable. The terms show whether the yearly rental result is a profit or loss. The tax rules then decide how to include that result in the owner's return.
Why is cash flow positive not always the same as a tax profit?
Cash flow tracks money that comes in and goes out over a set time. Rental profit for tax follows rules for deductions. Paying back debt, buying assets and paying tax can use cash. Those payments may not give a normal rental deduction for that year.
Depreciation, a deduction for eligible building or asset costs over time, can do the reverse. It can cut taxable profit without cash leaving the bank that year. A rental statement, bank balance and tax return can therefore show different totals for one property. The label makes more sense when it states how the result was worked out.
Illustrative example4 steps
A taxable surplus with less cash after principal repayments
- Assumed annual rent: $41,000, with $29,000 in deductible cash expenses including interest.
- Taxable rental profit before other adjustments: $41,000 minus $29,000 = $12,000.
- Assume the borrower also repays $8,000 of loan principal during the year.
- Cash remaining before tax: $12,000 minus $8,000 = $4,000, although the taxable profit is still $12,000.
For investors
Rental surplus describes income, not every cost of ownership.
Rent can cover normal rental costs yet leave a large cash bill for paying down debt or improving the property. A rental surplus also says nothing about the later sale result. Naming the time period and costs included helps explain claims about spare cash. Your accountant or registered tax agent can check rental profit, each owner's share and deductions apart from the cash budget.
Common questions
Questions about positive gearing
Keep learning
Property is a complex world.
Positive gearing is one piece of it. Taxes and duties decide what a property really costs to buy and to hold. Next, read about negative gearing, principal and interest loan and holding costs.
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