John owns a negatively geared investment property with annual rental income of $28,000 and deductible expenses of $35,000. If his marginal tax rate is 37%, what is his net after-tax loss?

Q: What is the correct answer to: John owns a negatively geared investment property with annual rental income of $28,000 and deductible expenses of $35,000. If his marginal tax rate is 37%, what is his net after-tax loss?

The correct answer is $4,410. Option B correctly calculates the net after-tax loss. The gross loss is $7,000 ($35,000 expenses minus $28,000 income). At John's 37% marginal tax rate, he receives a tax benefit of $2,590 ($7,000 × 0.37). This tax saving reduces his actual out-of-pocket loss to $4,410 ($7,000 - $2,590). This reflects the true economic impact of negative gearing under Australian taxation law, where losses can be offset against other income.

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

Negative gearing is a key Australian property investment strategy where rental expenses exceed rental income, creating a tax-deductible loss. Under Australian tax law (Income Tax Assessment Act), these losses can be offset against other taxable income, reducing overall tax liability. The marginal tax rate determines the value of this benefit - higher earners receive greater tax savings. Deductible expenses typically include interest, maintenance, insurance, rates, and depreciation. The Australian Taxation Office allows these deductions provided the property is genuinely available for rent and held for income-producing purposes. Understanding net after-tax calculations is crucial for property investment analysis and cash flow planning.

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

Remember LOSS: Loss minus Offset equals Savings Subtracted. First calculate the gross Loss (expenses minus income). Then find the tax Offset (loss × marginal rate). Finally, Subtract the tax Savings from the gross loss to get net after-tax loss. When you see negative gearing questions, immediately think LOSS. Calculate the gross loss first, then multiply by the tax rate to find savings, then subtract savings from gross loss for the net result.

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

Always work through negative gearing in three steps: 1) Calculate gross loss (expenses - income), 2) Calculate tax benefit (loss × marginal rate), 3) Calculate net loss (gross loss - tax benefit). Don't confuse the tax benefit amount with the final answer.

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

Sarah, a marketing manager earning $95,000 annually, purchases an investment property. The rental income is $24,000 but her deductible expenses total $31,000, creating a $7,000 loss. At her 32.5% marginal tax rate, she receives a $2,275 tax benefit, making her actual out-of-pocket cost $4,725. This calculation helps Sarah understand the true cost of her investment and plan her cash flow accordingly. Property managers often provide these calculations to help investors make informed decisions.

Question

Finance TaxationNegative GearingMEDIUM

John owns a negatively geared investment property with annual rental income of $28,000 and deductible expenses of $35,000. If his marginal tax rate is 37%, what is his net after-tax loss?

Answer Options

A

$7,000

B

$4,410

C

$2,590

D

$5,500