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?

Q: What is the correct answer to: 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?

The correct answer is Tax-deductible loss of $4,500 plus other allowable deductions. Option B correctly identifies that the loan interest ($49,500) exceeds rental income ($45,000) by $4,500, creating a tax-deductible loss. Crucially, it acknowledges that other allowable deductions (rates, insurance, maintenance, depreciation, management fees) will increase this loss further. Under Australian tax law, these investment property losses can be claimed against other taxable income through negative gearing provisions, providing tax benefits to the investor.

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

Negative gearing occurs when investment property expenses exceed rental income, creating a tax-deductible loss. In Australia, investors can claim this loss against other taxable income under Division 8A of the Income Tax Assessment Act. Allowable deductions include loan interest, council rates, insurance, maintenance, management fees, and depreciation. LVR (Loan to Value Ratio) determines borrowing capacity - 90% LVR means borrowing $900,000 on a $1,000,000 property. Interest-only loans defer principal repayments, maximizing tax-deductible interest expenses during the interest-only period.

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

G-ross rental income minus E-xpenses equals A-nnual tax position. R-emember other deductions increase losses. I-nterest is just one expense. N-egative result means tax benefit. G-reater deductions create greater benefits. When calculating investment property tax positions, always subtract ALL expenses from gross income. If the result is negative, it's a tax-deductible loss that can offset other income through negative gearing.

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

Always calculate: Rental income minus loan interest first, then remember other deductions will increase any loss. If expenses exceed income, it's a tax-deductible loss, not taxable income.

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

Sarah buys a $800,000 investment apartment with an 85% loan ($680,000) at 6% interest. Annual rent is $35,000, loan interest is $40,800, plus $8,000 in other expenses (rates, insurance, maintenance). Her total loss is $13,800, which she claims against her $90,000 salary, reducing her taxable income to $76,200 and saving approximately $4,500 in tax (assuming 32.5% marginal rate).

Question

Finance TaxationNegative GearingHARD

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?

Answer Options

A

Taxable income of $45,000

B

Tax-deductible loss of $4,500 plus other allowable deductions

C

No tax impact as income equals interest

D

Taxable income of $4,500