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This post covers the changes to negative gearing announced in the 2026–27 Federal Budget. As with all posts in this series, we start with the basics; because negative gearing is another area where the day-to-day language around it doesn't always match how it actually works. If you haven't done so already, it is important to know how Capital Gains Tax works, as Negative Gearing and CGT either work together, or against each other. (or in the case of the new budget, not at all)
Part 1: What is negative gearing and how does it work today?
An investment property is negatively geared when the costs of owning it exceed the rental income it generates. The most common driver is interest on the investment loan, particularly in a higher interest rate environment, but other deductible expenses like property management fees, council rates, insurance, repairs and depreciation also contribute.
Under the current system, if your investment property generates a net rental loss in a given year, that loss can be offset directly against your other income, typically your salary or wages. This reduces your taxable income and therefore your tax bill in that year. The larger your income, the more valuable this deduction is, because you're offsetting losses against a higher marginal tax rate.
This is the core of what makes negative gearing attractive in combination with capital gains, you receive a tax deduction on the losses now at your full marginal rate, while the eventual capital gain on sale benefits from the 50% CGT discount at what is often a lower marginal rate in retirement. The Government's own analysis found that nearly one in three negatively geared investment properties sold in 2022–23 resulted in investors paying less income tax than if they'd never bought the property at all, despite turning a nominal profit. In those cases the tax system was effectively subsidising the investment.
It's also worth noting that negative gearing is not unique to property, in theory it applies to any income-producing investment, including shares. However, over 98% of negatively geared losses in Australia come from residential property, largely because property is the one asset class where large-scale borrowing is readily available and widely used.
Part 2: What is changing from 1 July 2027?
From 1 July 2027, negative gearing for established residential properties is being quarantined. This means rental losses from established properties can no longer be offset against unrelated income, your salary, business income, or other investment income. Instead, those losses can only be offset against:
Any losses that can't be absorbed in the current year don't disappear, they are carried forward to future years and can be applied against residential property income or capital gains in those years. They are not lost, but they are locked in a ring-fence and can only be used within the residential property category.
This is exactly the same quarantining concept used for company tax losses and trust losses — The Commercial Loss Provision.
The budget papers include a simple example to illustrate: an investor buys an established property after Budget night and incurs a $10,000 net rental loss in 2027–28. That loss can't offset their salary. In 2028–29, the same property earns $6,000 in net rental income, the carried forward loss absorbs all of it, leaving $4,000 to carry forward again. The loss is never wasted, it just takes longer to realise.
Part 3: The critical dates, what's grandfathered and what isn't
This is where the detail matters enormously, and the Government has been deliberate about the transitional protection.
Properties purchased on or before 7:30pm AEST, 12 May 2026 (Budget night): Fully grandfathered, for as long as you own them. The existing negative gearing rules continue to apply in full. You can still offset rental losses against your salary and other income. This protection continues until you sell the property. It does not expire in 2027, it runs with the asset.
This is genuinely significant. It means the Budget changes have no practical impact on any investor who already owns an established residential property. Your current strategy, your current cash flow modelling, your current tax position, none of that changes unless you sell and buy again.
Contracts exchanged on or before Budget night but not yet settled: Also exempt. The CGT and legal principle here is that a binding contract creates the tax event at exchange, not settlement, so if you were under contract at 7:30pm on 12 May 2026, you're inside the grandfathering window.
Established residential properties purchased after Budget night: Subject to the new quarantining rules from 1 July 2027. If you buy an established property between now and 30 June 2027, you'll have one or two years of normal negative gearing before the rules change. After 1 July 2027 the quarantine applies.
New residential builds, the carve out: New builds that genuinely add to housing supply are fully exempt from the changes. Investors who buy a new build property retain full negative gearing, losses can offset against all income including salary, regardless of when the property is purchased. The Government's explicit intention is to direct investment towards new supply rather than competition for existing stock.
Additional exemptions also apply to widely held trusts, superannuation funds, build-to-rent developments, and private investors supporting government housing programs.
Commercial property and shares: Completely unaffected. The quarantining applies only to residential property. If you own a negatively geared commercial property or hold shares on margin, your existing arrangements don't change.
Part 4: How does the quarantining actually work in practice?
Think of it like a separate tax bucket that only residential property losses can fill and only residential property income or gains can drain.
Here's a more detailed example to illustrate the real-world impact. An investor purchases an established property in late 2027 for $750,000 with an 80% interest-only loan at 6%. Annual interest cost alone is $36,000. Rental income is $28,000. Property management, rates, insurance and depreciation add another $8,000 in deductions. Net rental loss: $16,000 per year.
Under the old rules, that $16,000 would reduce taxable salary income each year, saving someone on a 37% marginal rate approximately $5,920 per year in tax. Over five years, that's nearly $30,000 in tax saved against salary.
Under the new rules, that $16,000 per year accumulates as a carried forward loss. After five years, $80,000 in quarantined losses have built up. None of it has reduced their salary tax. When the property is eventually sold and a capital gain is realised, that $80,000 in accumulated losses can be applied against the gain, reducing the taxable gain by $80,000 before the indexation and 30% minimum tax calculations are applied.
The losses aren't gone, but the timing difference is significant. Instead of immediate tax relief each year, the benefit is deferred to the point of sale. For a highly leveraged investor relying on the annual tax refund to help service the loan, this changes the cash flow equation materially.
Part 5: How negative gearing and the CGT changes interact
It's important to read the negative gearing and CGT changes together, because historically their combination is what made highly leveraged property investment so attractive.
The classic strategy was: borrow heavily, generate rental losses, offset against salary at 37–47%, hold for years, sell after retirement at a low marginal rate, apply the 50% CGT discount, pay minimal tax on the gain. The tax system effectively funded part of the holding cost while the capital appreciation accrued largely tax-free in real terms.
From 1 July 2027, both sides of this equation are changed simultaneously. The rental losses no longer offset salary income, they sit in the quarantine bucket. The capital gain is no longer halved, it's indexed for inflation only, with a 30% minimum tax floor. The compounding tax advantage that made leveraged residential property so attractive relative to other asset classes is substantially reduced. (With a 30% tax floor and no negative gearing; do the changes to Family Trusts work out the same, but with more flexibility?)
The Government's assessment is that this will reduce investor demand for established properties, modestly slow price growth by around 2% relative to no change over a couple of years, and result in approximately 75,000 more owner-occupiers entering the market over the next decade. The impact on rents is projected to be less than $2 per week at the median, modest, though this remains a subject of active debate among economists.
Part 6: What does this mean for you?
If you currently own an established investment property: Nothing changes. You are fully grandfathered for as long as you hold the property. Your negative gearing strategy continues exactly as it is today.
If you are considering buying an established investment property: The economics have changed materially from 1 July 2027. The annual tax benefit of rental losses against your salary disappears. You need to model the investment on its cash flow merits and capital growth assumptions, not on the assumption that the tax system will subsidise your holding costs. This doesn't make property investment a bad decision, but it does mean the old rule of thumb that negative gearing "costs nothing because you get it back in tax" no longer holds for new purchases of established properties.
If you are considering buying a new build as an investment: Full negative gearing is retained. You also retain the choice between the 50% CGT discount and the new indexation rules when you eventually sell. New builds remain the most tax-advantaged form of residential property investment under the new system. Which is precisely the Government's intention.
If you have an existing negatively geared property and are thinking about selling and upgrading to a better investment property: This is a decision that warrants careful advice. Selling your current property and buying another established property after Budget night means your replacement property falls under the new rules, while your current property was grandfathered. The grandfathering does not transfer, it belongs to the asset, not the investor.
This post is general information based on the 2026–27 Federal Budget papers released 12 May 2026. It does not constitute personal financial or tax advice. The legislative details of these changes are yet to be finalised. If you own investment property or are considering a property investment, please speak with us before making any decisions.
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