An investor owns a negatively geared property that generates a $15,000 annual loss and is in the 37% tax bracket. They sell the property after 3 years for a $90,000 capital gain. What is their net tax position for the final year?

Q: What is the correct answer to: An investor owns a negatively geared property that generates a $15,000 annual loss and is in the 37% tax bracket. They sell the property after 3 years for a $90,000 capital gain. What is their net tax position for the final year?

The correct answer is $5,550 tax refund on the loss and $16,650 tax on the gain. Option A correctly separates the treatment of revenue loss and capital gain. The $15,000 negative gearing loss generates a tax refund of $5,550 (37% × $15,000) as it's deductible against other income. The $90,000 capital gain, held for over 12 months, qualifies for the 50% CGT discount, making $45,000 taxable. At 37% tax rate, this equals $16,650 tax payable. These calculations remain separate because revenue losses cannot be directly offset against capital gains under Australian tax law.

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

Australian taxation treats investment property losses and capital gains separately. Negative gearing allows revenue losses to be deducted against other assessable income, providing immediate tax benefits. Capital gains tax applies when properties are sold, but assets held over 12 months qualify for a 50% discount under Division 115 of the Income Tax Assessment Act 1997. This means only half the capital gain is included in assessable income. Revenue losses cannot be directly offset against capital gains - they remain separate calculations. The marginal tax rate applies to both the deductible loss (as a benefit) and the discounted capital gain (as additional assessable income).

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

Think of tax calculations as having two separate buckets: the 'Revenue Bucket' (rental losses, deductions) and the 'Capital Bucket' (gains from sale). You cannot pour from one bucket into the other - they're calculated separately. Revenue losses give immediate tax refunds, while capital gains (after 50% discount if held >12 months) create additional tax liability. When you see negative gearing and capital gains in the same question, immediately visualize the two buckets. Calculate each bucket separately: revenue loss × tax rate = refund, and (capital gain ÷ 2 if held >12 months) × tax rate = additional tax. Never mix the buckets.

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

Always separate revenue items from capital items. For properties held over 12 months, halve the capital gain before applying the tax rate. Calculate the tax benefit of losses and tax on gains separately - never offset them directly.

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

Sarah owns a rental property generating $15,000 annual losses through negative gearing. She's in the 37% tax bracket, so receives $5,550 back each year at tax time. After three years, she sells for a $90,000 profit. Having held it over 12 months, only $45,000 is taxable, resulting in $16,650 additional tax. Her accountant explains these are separate calculations - she can't use the sale profit to reduce her ongoing negative gearing benefits, nor can she use accumulated losses to reduce the capital gains tax.

Question

Finance TaxationNegative GearingHARD

An investor owns a negatively geared property that generates a $15,000 annual loss and is in the 37% tax bracket. They sell the property after 3 years for a $90,000 capital gain. What is their net tax position for the final year?

Answer Options

A

$5,550 tax refund on the loss and $16,650 tax on the gain

B

$5,550 tax refund on the loss and $33,300 tax on the gain

C

$11,100 net tax payable after offsetting loss against gain

D

$27,750 net tax payable after all calculations