An investor owns a negatively geared property with annual rental income of $25,000 and total deductible expenses of $35,000. If their marginal tax rate is 37%, what is their annual tax saving?

Q: What is the correct answer to: An investor owns a negatively geared property with annual rental income of $25,000 and total deductible expenses of $35,000. If their marginal tax rate is 37%, what is their annual tax saving?

The correct answer is $3,700. Option A correctly calculates the tax saving from negative gearing. The net loss is $35,000 (expenses) minus $25,000 (income) = $10,000. Under Australian tax law, this loss can be offset against other taxable income. At the investor's marginal tax rate of 37%, the tax saving is $10,000 × 0.37 = $3,700. This represents the actual reduction in tax payable due to the deductible property loss.

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

Negative gearing is an Australian tax strategy where property expenses exceed rental income, creating a deductible loss. Under Income Tax Assessment Act 1997, investors can offset this loss against other taxable income, reducing overall tax liability. The marginal tax rate determines the actual tax saving - the percentage of the loss that translates to reduced tax payments. Common deductible expenses include loan interest, property management fees, repairs, depreciation, and council rates. This strategy is particularly relevant for Certificate IV property professionals advising clients on investment structures and cash flow implications.

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

Remember LOSS: Loss × Ordinary tax rate = Savings. Like a discount coupon - if you have a $100 loss and 37% 'discount rate', you save $37 in tax. The government gives you back 37 cents for every dollar you lose on the property. When you see negative gearing questions, immediately identify the LOSS (expenses minus income), then multiply by the tax rate to find your Savings. Don't get distracted by total expenses or income amounts.

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

Always calculate the net loss first (expenses minus income), then multiply by the marginal tax rate. Ignore total expenses and income figures - focus only on the loss amount and tax rate.

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

Sarah buys an investment property with $45,000 annual expenses (loan interest, rates, management fees) but only receives $30,000 rental income. Her $15,000 loss at a 32.5% marginal tax rate saves her $4,875 in tax. This improves her cash flow position and makes the investment more viable. As a property professional, you'd explain this benefit helps offset the property's negative cash flow during the growth phase.

Question

Finance TaxationNegative GearingMEDIUM

An investor owns a negatively geared property with annual rental income of $25,000 and total deductible expenses of $35,000. If their marginal tax rate is 37%, what is their annual tax saving?

Answer Options

A

$3,700

B

$9,250

C

$10,000

D

$12,950