An investor purchased a property using a 90% LVR interest-only loan at 5.5% per annum. The property cost $1,000,000 and generates $45,000 annual rent. After claiming all allowable deductions including $49,500 loan interest, what is the annual tax impact?
Correct Answer
B) A loss of at least $4,500, which other deductions such as rates will increase.
The loan interest alone ($900,000 × 5.5% = $49,500) exceeds the rental income ($45,000) by $4,500. When combined with other allowable deductions such as council rates, insurance, maintenance, and depreciation, the total tax-deductible loss will be even greater, creating a negative gearing benefit.
Why This Is the Correct Answer
Interest of $900,000 × 5.5% = $49,500 exceeds the $45,000 rent by $4,500 before any other deduction. Rates, insurance, repairs, management fees and depreciation add to that loss, which can be offset against the investor's other income.
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