A property investor has an investment loan with principal and interest repayments of $3,200 per month, receives rental income of $2,800 per month, and has other property expenses of $200 per month. What is the monthly negative gearing loss?

Q: What is the correct answer to: A property investor has an investment loan with principal and interest repayments of $3,200 per month, receives rental income of $2,800 per month, and has other property expenses of $200 per month. What is the monthly negative gearing loss?

The correct answer is $600. Option B ($600) is correct because it properly calculates the monthly negative gearing loss. Total deductible expenses are $3,400 ($3,200 loan repayments + $200 other expenses) minus rental income of $2,800, resulting in a $600 monthly loss. This calculation follows Australian taxation principles where investment property expenses that exceed rental income create a deductible loss that can offset other taxable income, subject to ATO guidelines and substantiation requirements.

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

Negative gearing is an Australian tax strategy where investment property expenses exceed rental income, creating a deductible loss. Under Australian tax law, investors can claim deductions for loan interest, property management fees, maintenance, insurance, depreciation, and other legitimate expenses. The loss can offset other taxable income, reducing overall tax liability. However, only the interest portion of loan repayments is deductible, not principal repayments. The ATO requires proper record-keeping and substantiation of all claimed expenses. This strategy is particularly relevant given Australia's capital gains tax discount for assets held over 12 months.

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

Remember RING: Rental income minus (Interest + Non-interest expenses) = Gearing loss. Think of a boxing ring where rental income fights against all expenses - when expenses win, you have negative gearing that 'rings up' tax deductions. When you see negative gearing questions, visualize the RING: identify Rental income, then subtract all Interest and Non-interest expenses. The difference (if negative) is your gearing loss that can reduce taxable income.

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

Always identify total deductible expenses first, then subtract rental income. Remember that all loan repayments count as expenses for cash flow purposes, but only interest is tax-deductible in practice.

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

Sarah owns an investment property in Melbourne with a $500,000 loan at 6% interest. Her monthly repayments are $3,200, she receives $2,800 rent, and pays $200 in other expenses. The $600 monthly shortfall means she must contribute from her salary to cover costs, but this negative gearing loss can be claimed against her other income, potentially saving thousands in tax annually and improving the investment's overall return through tax benefits.

Question

Finance TaxationNegative GearingMEDIUM

A property investor has an investment loan with principal and interest repayments of $3,200 per month, receives rental income of $2,800 per month, and has other property expenses of $200 per month. What is the monthly negative gearing loss?

Answer Options

A

$400

B

$600

C

$800

D

$200