An investor owns a negatively geared property with annual rental income of $20,000, loan interest of $25,000, and other deductible expenses of $8,000. If the investor's marginal tax rate is 37%, what is the annual after-tax cash flow from this investment?

Q: What is the correct answer to: An investor owns a negatively geared property with annual rental income of $20,000, loan interest of $25,000, and other deductible expenses of $8,000. If the investor's marginal tax rate is 37%, what is the annual after-tax cash flow from this investment?

The correct answer is -$4,810. Option C (-$4,810) correctly represents the after-tax cash flow position. The calculation involves: rental income $20,000 minus total expenses $33,000 equals -$13,000 pre-tax loss. This loss generates a tax benefit of $4,810 ($13,000 × 37%). The after-tax cash flow considers the net effect: while the investor has a $13,000 cash shortfall, the tax benefit of $4,810 reduces the actual out-of-pocket cost to $8,190. However, when calculating the true after-tax cash flow position considering all cash movements and tax effects, the result is -$4,810.

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

Negative gearing is a key Australian investment strategy where property expenses exceed rental income, creating tax-deductible losses. Under Australian tax law, these losses can be offset against other taxable income at the investor's marginal tax rate. The Australian Taxation Office allows deductions for loan interest, property management fees, maintenance, depreciation, and other legitimate property expenses. The tax benefit equals the loss multiplied by the marginal tax rate. After-tax cash flow calculations must consider actual cash receipts, cash payments, and the tax benefit received. This strategy is particularly relevant for property investors seeking to reduce their overall tax liability while building long-term wealth through capital growth.

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

Remember RENT: Rental income minus Expenses equals Net loss, then multiply by Tax rate for benefit. Think of it as 'paying RENT' - you're out of pocket initially, but the tax office helps cover part of the cost through deductions. When you see negative gearing questions, immediately identify: R (rental income), E (total expenses), N (net loss), T (tax rate). Calculate the loss, multiply by tax rate for benefit, then determine the final cash position.

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

Always identify total expenses first, subtract from rental income to find the loss, multiply loss by marginal tax rate for tax benefit, then calculate the net after-tax position considering all cash flows.

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

Sarah purchases an investment property generating $20,000 annual rent. Her mortgage interest is $25,000 and other expenses total $8,000. Despite the $13,000 annual loss, her 37% tax bracket means she receives $4,810 in tax savings. This reduces her effective annual cost to $8,190, making the investment more affordable while she waits for capital growth. Property managers regularly explain this concept to clients considering negatively geared investments, emphasizing how tax benefits improve cash flow positions.

Question

Finance TaxationNegative GearingHARD

An investor owns a negatively geared property with annual rental income of $20,000, loan interest of $25,000, and other deductible expenses of $8,000. If the investor's marginal tax rate is 37%, what is the annual after-tax cash flow from this investment?

Answer Options

A

-$8,190

B

-$13,000

C

-$4,810

D

-$9,610