A property investor claims the following annual expenses: mortgage interest $15,000, property management fees $2,000, council rates $1,500, and depreciation $3,000. If the annual rental income is $18,000, what is the tax-deductible loss?

Q: What is the correct answer to: A property investor claims the following annual expenses: mortgage interest $15,000, property management fees $2,000, council rates $1,500, and depreciation $3,000. If the annual rental income is $18,000, what is the tax-deductible loss?

The correct answer is $3,500. Option B ($3,500) correctly calculates the tax-deductible loss by subtracting total rental income ($18,000) from total allowable deductions ($21,500). Under Australian taxation law, all listed expenses are legitimate deductions for rental properties: mortgage interest as a financing cost, property management fees as operational expenses, council rates as holding costs, and depreciation as a capital allowance. The resulting negative amount represents a tax-deductible loss that can offset other taxable income under negative gearing provisions.

Q: What background knowledge is needed for this Finance Taxation question?

Under Australian taxation law, property investors can claim various expenses against rental income including mortgage interest, property management fees, council rates, insurance, repairs, and depreciation. When total allowable deductions exceed rental income, the resulting loss can be offset against other taxable income through negative gearing. The Australian Tax Office recognizes these deductions as legitimate costs of earning rental income. Depreciation represents the decline in value of depreciable assets like fixtures and fittings. This tax treatment encourages property investment by allowing investors to reduce their overall tax liability even when properties generate negative cash flow.

Q: What is a good way to remember the answer to this Finance Taxation question?

Remember MILD: Minus Income from Listed Deductions. Like milk going sour (negative), when your deductions exceed income, you get a tax loss that's actually beneficial. When calculating tax-deductible losses, always remember MILD - take your total Listed deductions and Minus the Income to find your Loss (if Deductions exceed income).

Q: What exam tip applies to this Finance Taxation question?

Always add up ALL allowable deductions first, then subtract rental income. If deductions exceed income, the difference is your tax-deductible loss. Don't confuse gross expenses with net loss calculations.

Q: How does this Finance Taxation concept apply in Australian real estate practice?

Sarah owns an investment property generating $18,000 annual rent. Her accountant calculates her deductions: $15,000 mortgage interest, $2,000 management fees, $1,500 rates, and $3,000 depreciation. Total deductions of $21,500 exceed her $18,000 income by $3,500. This loss reduces her taxable income from her job, potentially saving thousands in tax. Despite negative cash flow, the tax benefits make the investment financially viable through negative gearing.

Question

Finance TaxationNegative GearingMEDIUM

A property investor claims the following annual expenses: mortgage interest $15,000, property management fees $2,000, council rates $1,500, and depreciation $3,000. If the annual rental income is $18,000, what is the tax-deductible loss?

Answer Options

A

$2,500

B

$3,500

C

$21,500

D

$18,500