An investor owns a negatively geared property with annual rental income of $30,000 and total deductible expenses of $45,000. If their marginal tax rate is 37%, what is their annual tax saving from negative gearing?

Q: What is the correct answer to: An investor owns a negatively geared property with annual rental income of $30,000 and total deductible expenses of $45,000. If their marginal tax rate is 37%, what is their annual tax saving from negative gearing?

The correct answer is $5,550. Option A correctly calculates the tax saving from negative gearing. The net loss is $15,000 ($45,000 expenses - $30,000 income). Under Australian tax law, this loss can be offset against other taxable income. The tax saving equals the net loss multiplied by the marginal tax rate: $15,000 × 37% = $5,550. This represents the actual reduction in tax payable on the investor's other income sources, demonstrating how negative gearing provides immediate tax benefits to property investors.

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

Negative gearing is a tax strategy where property expenses exceed rental income, creating a deductible loss under Australian tax law. The Income Tax Assessment Act 1997 allows investors to offset this loss against other taxable income, reducing overall tax liability. Key deductible expenses include interest on investment loans, property management fees, maintenance, insurance, and depreciation. The marginal tax rate determines the actual tax saving - higher income earners receive greater benefits. This strategy is particularly relevant in Australia's property market, where investors often accept short-term losses for long-term capital gains, supported by the tax system's treatment of investment property losses.

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

Remember LOSS: Loss = Outgoings minus rental income, then multiply by your marginal tax rate for Savings. Think of it as 'I LOST money on rent, but SAVED on tax.' The tax office gives you back a percentage (your marginal rate) of what you lost. When you see negative gearing questions, immediately think LOSS: calculate the loss first (expenses minus income), then multiply by the marginal tax rate. Don't get distracted by total expenses or rental income alone - focus on the net loss amount.

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

Always calculate the net loss first (expenses minus rental income), then multiply by the marginal tax rate. Don't apply the tax rate to total expenses or rental income separately - only the net loss creates the tax deduction.

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

Sarah, a high-income professional, purchases an investment property generating $30,000 annual rent. Her property expenses total $45,000 including loan interest, management fees, and maintenance. The $15,000 net loss reduces her taxable income, saving $5,550 in tax at her 37% marginal rate. This tax saving improves her cash flow position, making the investment more viable despite the negative cash flow. Real estate agents must understand these calculations to properly advise investor clients on property selection and financial planning.

Question

Finance TaxationNegative GearingMEDIUM

An investor owns a negatively geared property with annual rental income of $30,000 and total deductible expenses of $45,000. If their marginal tax rate is 37%, what is their annual tax saving from negative gearing?

Answer Options

A

$5,550

B

$11,100

C

$15,000

D

$16,650