Sarah owns an investment property that generates $25,000 annual rental income. Her annual expenses are $18,000 in interest, $3,000 in rates and maintenance, and $2,000 in management fees. What is her tax position?

Option B: Negative gearing with $2,000 loss

Option B incorrectly identifies this as negative gearing. Negative gearing occurs when deductible expenses exceed rental income, creating a tax-deductible loss. Here, income ($25,000) exceeds expenses ($23,000), so there's no loss. The $2,000 difference represents profit, not loss, making this positive gearing rather than negative gearing.

Option C: Break-even position

Option C suggests a break-even position where income equals expenses. However, Sarah's rental income ($25,000) exceeds her total expenses ($23,000) by $2,000. A break-even position would require expenses to equal exactly $25,000, which is not the case here.

Option D: Positive gearing with $7,000 profit

Option D incorrectly calculates the profit as $7,000. This appears to subtract only the interest expense ($18,000) from rental income ($25,000), ignoring the other deductible expenses of rates, maintenance, and management fees totaling $5,000. The correct profit calculation must include all deductible expenses, resulting in $2,000 profit, not $7,000.