A geared investment, is one that has an loan attached to it. Borrowing to invest creates financial leverage, which enables us to gain access to a wide range of investment options which would not be available if we used only our own funds. Gearing can be used with all sorts of investments including shares, managed funds, business, and residential property.

Negative gearing occurs when the costs of holding an investment outweighs any income generated by that investment. This means that as investor, you need to contribute some of your own funds in order to cover interest on loans and other ongoing costs.

Positive gearing occurs when the costs of holding an investment are less than the income generated by that investment. This means that the investment if essentially paying for itself, and the investor does not need to contribute additional funds in order to hold the investment.

The difference between negative and positive gearing, is in the impact the investment has on your income. A positive geared investment generates a net income gain for the investor. A negative geared investment creates a net income loss for the investor. Investors with positive geared investments will pay tax on their additional income. Investors with negative geared investments will be able to claim a tax deduction on the income losses they incurred from holding their investment. The difference is shown in the table below: