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The four main categories of property are residential property, commercial property, real estate investment trusts and property syndicates.
Negative gearing occurs when the expenses of a residential property (interest, depreciation, etc.) are greater than the income (i.e. rent) received. This creates a loss which can be used to offset income tax.
If owned outright, property can generate return from capital gains and/or through rent. If you have bought a REIT you will receive distributions of rental income or dividends depending on the company’s structure.

Gearing is simply when you borrow money to invest in an asset. When people are talking about negative gearing in the media, they are usually referring to the practice of borrowing to purchase an investment property. Negative gearing means that the rental return of the investment property is less than the interest payments and other property expenses. Negative gearing losses can be used to reduce your tax bill by offsetting the loss you have on your investment property (the difference between your interest payments and other property expenses and the rental income against your taxable income). 

Most investors use negative gearing for the tax deductions available. Negative gearing losses can be used to offset your taxable income, thus reducing the amount of tax you need to pay. Investors also hope that when the property is eventually sold they will receive capital gains by selling the property for higher than they bought it.

Negative gearing involves borrowing money (also known as gearing or leverage) to purchase an investment property. Next, the rental payments from the investment property need to be less than the interest costs and general property upkeep. These losses can be deducted from the investor’s taxable income, reducing the amount of tax the investor needs to pay. As a result of the loss between rental payments and interest payments and other property expenses, this is known as negative gearing. If the opposite occurred, and rental payment was above interest and other investment property related expenditure, the investment would be positively geared.

Apart from tax benefits, negative gearing becomes profitable if the investment property is sold at a profit or capital gain. Here investors are banking on selling the property for more than they bought it for, also known as capital gains in order to make a profit. If the property prices rise, the total value of the asset rises and the investor has made money.

Investors need to consider whether or not they have the funds to be financially sound whilst incurring the losses for negative gearing. Interest rates also need to be monitored as well. Investors must ensure they have other sources of income to cover the expenses in the meantime.

Suppose you bought a property for $600,000 by taking out a $500,000 loan with an interest rate of 7%. This means that the interest payments are $35,000 annually.

Meanwhile, you are renting out the investment property for $550 a week, which is $28,600 over the whole year.

Since you are paying $35,000 in interest but only earning $28,600 in rental income, you have a net loss of $6,400. This means that you are negatively geared. You can offset the $6,400 against your taxable income to pay less tax.

A year later your property is valued at $648,000 as property prices have risen 8%. Therefore even though you had a loss of $6,400, you are $41,600 better off than the year before as the capital gain is much higher than loss you made on repayments.

 

Related topics

When you invest in an Active ETF you are investing in a portfolio of many different assets. The Active ETF is actively managed by a portfolio manager and investment team. You will receive distributions of the fund’s net income.

 

Active ETFs are actively managed by a portfolio manager and investment team to generate alpha and outperform a set benchmark. To invest in an Active ETF you will need to buy some units using your broker. You will also pay a management fee which is usually included in the unit price and in return for investing in the Active ETF you will receive distributions of the Active ETF's net income.

 

Investing in an Active ETF means that you will own units in the fund but not the underlying securities or derivatives themselves.

They provide access to a range of asset classes and investment strategies that non-institutional investors may not ordinarily have access to, for example international equities, fixed income securities and currency markets. By investing in an Active ETF/EQMF you can achieve a level of diversification that would normally be too difficult to realise investing in each asset individually. Active ETFs/EQMFs also have no minimum investment requirements which makes them more accessible. They benefit investors who prefer an active investing strategy and want their money to outperform the benchmark.  

 

Furthermore, Active ETFs/EQMFs are a way of investing in an actively managed fund without the hassle of the paperwork required by traditional unlisted managed funds. With no waiting times and the ability to choose which price you invest in the fund, Active ETFs/EQMFs make investing more accessible. Investing more money is as simple as purchasing new units. Investments in Active ETFs/EQMFs are more liquid than traditional managed funds making them a more flexible choice.

A traditional unlisted managed fund often has minimum investment requirements that an Active ETF does not have. Managed funds are not listed on the exchange, and thus require much more paperwork to invest in the fund. Active ETFs, on the other hand, can be traded easily through a broker. Active ETFs can be traded like ordinary shares unlike managed funds.

The increased paperwork associated with traditional unlisted managed funds means that you may have to wait before your money gets invested. Active ETFs make investing more accessible by allowing you to invest quickly and hassle free with the help of your broker. This also means that investments in Active ETFs are more liquid than traditional unlisted managed funds.

Nothing, they are different names for the same investment vehicle. They are also sometimes known as listed managed funds, exchange quoted managed funds (EQMFs) or quoted managed funds. 

An Active ETF is a managed fund traded on a stock exchange. They function like managed funds, but traded like shares which can be bought and sold during trading day on the stock exchange. Active ETFs are actively managed by fund managers to generate alpha and outperform relevant benchmarks.

Active ETFs will aim to beat the benchmark using a number of active investing strategies. They operate in a similar way to traditional managed funds but have the benefit of transparent, live intra-day pricing and market making ability which ensures liquidity 

Investors invest in the Active ETF by using a stockbroker as if they were buying a share. Similarly, liquidating the investment follows a similar process to selling a share. This means that your Active ETF can be monitored and reported like any of your other shares.

Active ETFs are similar to the passively managed ETFs. Instead of using a passive investment strategy mimicking an index or other benchmark, Active ETFs have a fund manager who makes active decisions about what to invest in. Active ETFs aim to beat the benchmark or index whereas ETFs aim to follow the benchmark or index as closely as possible. Whilst Active ETFs will try to avoid falls in the benchmark, ETFs will go down when their benchmarks fall. As a result of an active investing strategy, Active ETFs will have higher fees to pay for the skill and experience of the fund manager.

Active ETFs and ETFs share similarities in that they are both listed on the exchange and investments in them are made through purchasing units via a broker.