Key Takeaways
- The negative gearing reforms became law on 26 June 2026 and are scheduled to apply from 1 July 2027.
- Qualifying residential properties held at 7:30pm AEST on 12 May 2026 are generally exempt from the new negative gearing restrictions.
- For affected established residential properties, excess deductions may generally be restricted from offsetting unrelated income, while qualifying new builds may retain broader negative gearing treatment.
- Tax treatment is only one consideration: cash flow, borrowing capacity, serviceability buffers, lender policy and property fundamentals may have a greater practical effect on an investor’s position.
Negative gearing is entering a new phase in Australia. The reforms announced in the 2026–27 Federal Budget became law on 26 June 2026 and are scheduled to apply from 1 July 2027. For property investors, the immediate question is no longer whether the changes might pass Parliament. It is how the legislated rules may affect an existing property, a future purchase and the finance required to support it.
The distinction matters because the reforms do not affect every residential investment property in the same way. Qualifying properties held at the Budget-night cut-off are generally protected from the new negative gearing restrictions, while later acquisitions may receive different treatment depending on whether the property qualifies as a new residential build or is established housing.
Tax treatment is only one part of the decision. An investment property still needs to be supported by suitable cash flow, sufficient borrowing capacity and a loan structure that can remain manageable if interest rates, rent, expenses or personal income change. Lenders may also assess rental income, existing debt and negative gearing benefits differently.
For borrowers considering an investment property purchase or portfolio review, speaking with experienced mortgage brokers in Sydney may help clarify how current lender policies, serviceability requirements and loan structures apply to their circumstances. Tax eligibility and deductibility should be confirmed separately with a qualified tax adviser.
This guide explains how negative gearing works, what changes from 1 July 2027, how qualifying new builds and established properties may be treated, and why lender assessment can be just as important as the tax rules.
What Is Negative Gearing?
Negative gearing occurs when the deductible costs associated with an income-producing investment exceed the income generated by that investment. In residential property, this generally means the eligible costs of owning and holding a rental property are greater than the assessable rent received.
Although negative gearing is commonly associated with real estate, it is not limited to property. The Australian Government Treasury indicates that negative gearing may also apply to certain income-producing assets, including shares, where eligible deductions exceed the income generated, subject to the applicable tax rules.
Depending on the property and the investor’s circumstances, potentially deductible expenses may include:
- interest on funds borrowed for an income-producing purpose;
- property management fees;
- council rates and eligible water charges;
- strata or body corporate levies;
- landlord insurance;
- eligible repairs and maintenance;
- certain accounting expenses;
- eligible depreciation and capital works deductions.
Not every property-related payment is immediately deductible. Principal repayments, acquisition costs and capital improvements may receive different tax treatment. Interest deductibility generally depends on how borrowed funds are used rather than only on the property offered as loan security.
When eligible deductions exceed assessable rental income, the result is a net rental loss. Under the rules applying before 1 July 2027, an eligible loss may generally be offset against other assessable income, such as salary or wages, subject to the ordinary tax rules and the investor’s circumstances.
For example, an investor earning $140,000 from employment who records an eligible net rental loss of $12,000 may have taxable income of approximately $128,000 before considering other income, deductions or adjustments. The actual result would depend on which expenses are deductible and the investor’s wider tax position.
The investor does not receive the entire $12,000 back. The underlying cash loss still exists. A tax deduction may reduce part of its after-tax cost, depending on the investor’s marginal tax rate and circumstances.
How Negative Gearing Works in Practice
Understanding negative gearing requires more than comparing rent with a tax return. Investors may need to consider actual cash flow, deductible expenses and the way a lender assesses the property. These figures are related, but they are not necessarily the same.
Rental Income
Rental income generally includes rent and certain other payments received in connection with the property. An investor may use the expected weekly rent when preparing a personal budget, but a lender may use a lower amount when calculating borrowing capacity.
Many lenders apply rental income shading. For example, a lender may use only part of the verified gross rent to allow for potential vacancies, management fees and property expenses. The accepted percentage varies by lender and may also depend on whether the income is supported by a lease, rental statement or valuation.
This means a property producing $700 per week may not contribute the full annualised amount to the lender’s serviceability calculation.
Property Expenses
Holding costs can vary significantly between properties. An apartment with substantial strata levies may produce a different cash-flow result from a house with similar rent. An older property may require more maintenance, while a new property may involve a higher purchase price or valuation risk.
Common cash outgoings may include:
- loan repayments and interest;
- council and water charges;
- insurance premiums;
- strata or body corporate fees;
- property management fees;
- repairs and maintenance;
- land tax where applicable;
- vacancy periods and leasing costs.
Some of these amounts may be deductible, some may be deductible over time, and others may not be deductible. Investors may therefore benefit from keeping the cash-flow calculation separate from the tax calculation.
Net Rental Losses
Consider a simplified example:
- Annual assessable rental income: $36,000
- Annual eligible deductions: $50,000
- Net rental loss: $14,000
Before 1 July 2027, that eligible loss may generally be offset against other assessable income. From 1 July 2027, the treatment may depend on when the property was acquired and whether it is grandfathered, an eligible new build or an affected established residential property.
Regardless of the tax treatment, the investor still needs sufficient income or available funds to cover the property’s actual cash-flow shortfall. This practical funding requirement is one reason lenders do not assess an investment application solely by reference to tax deductions.
Negative Gearing Versus Positive Gearing
Negative gearing is only one possible property cash-flow position. Comparing it with positive and neutral gearing may help an investor understand the trade-off between current income, holding costs and longer-term objectives.
Positive gearing generally occurs when rental income exceeds the property’s deductible expenses, producing a taxable rental profit. Neutral gearing generally describes a position where income and relevant expenses are broadly similar, although the tax and cash-flow calculations may still differ.
A positively geared property may provide more immediate cash flow, but it could have different growth prospects, maintenance requirements or location characteristics. A negatively geared property may involve a larger ongoing funding commitment and greater sensitivity to interest rates, vacancies and income changes.
Neither approach is automatically more suitable. Relevant considerations may include:
- the investor’s income and marginal tax rate;
- available savings and cash-flow buffers;
- the size and structure of the loan;
- rental yield and expected holding costs;
- risk tolerance and investment timeframe;
- future borrowing plans;
- the property’s location and market fundamentals.
The new rules may make this comparison more important for affected established properties because an eligible rental loss may no longer provide an immediate offset against unrelated income after 1 July 2027.
Current Negative Gearing Rules Before 1 July 2027
Until the legislated changes begin applying, the existing negative gearing framework generally continues. Eligible net rental losses may usually be offset against other assessable income, subject to the ordinary deduction rules.
Potential income categories against which an eligible loss may currently be applied can include:
- salary and wages;
- business income;
- other investment income;
- other assessable income.
The treatment of each expense depends on its purpose and character. For example, repairs that restore damage or deterioration may be treated differently from renovations that improve the property. Borrowing expenses, depreciation and capital works may also be claimed over different periods.
Loan purpose is particularly important. If an investor refinances an investment loan and uses part of the additional borrowing for private expenses, interest on the private portion may not become deductible merely because the loan is secured against an investment property.
Property investors may therefore benefit from maintaining clear loan splits and records showing how borrowed funds were used. Tax treatment should be confirmed with a qualified adviser rather than inferred from the name of the loan or the security property.
Understanding the Legislated Negative Gearing Changes
The negative gearing reforms became law on 26 June 2026 and are scheduled to apply from 1 July 2027. The changes generally limit broad negative gearing treatment for residential property investments acquired after the grandfathering cut-off to qualifying new residential builds.
The rules do not remove every deduction associated with an affected established property. Instead, they generally restrict the ability to use excess residential property deductions to reduce unrelated income, such as salary or wages.
At a high level, the framework provides that:
- qualifying properties held at 7:30pm AEST on 12 May 2026 are generally exempt from the new negative gearing restrictions;
- qualifying new residential builds may continue to receive broader negative gearing treatment;
- affected established residential properties may have excess deductions quarantined from unrelated income;
- restricted amounts may generally be carried forward and used under the residential property loss rules;
- the treatment of a particular property depends on the legislation, acquisition timing, ownership and property characteristics.
The grandfathering cut-off and the commencement date serve different purposes. The relevant grandfathering time was 7:30pm AEST on 12 May 2026. The new restrictions are scheduled to apply from 1 July 2027.
An established residential property acquired after the Budget-night cut-off does not generally obtain grandfathered treatment merely because the purchase occurs before 1 July 2027. Investors with contracts spanning the cut-off or unusual acquisition arrangements may need specific tax or legal advice.
Why the Rules Were Changed
The Government’s stated policy objective is to direct more investor demand towards newly constructed housing and support additional housing supply. Limiting broader negative gearing treatment to qualifying new builds may affect the relative tax treatment of new and established properties.
Whether the reforms contribute to additional supply may also depend on factors beyond taxation, including:
- planning and development approvals;
- construction costs and labour availability;
- builder capacity and insolvency risk;
- interest rates and access to development finance;
- population and migration trends;
- local infrastructure and buyer demand.
Investors may therefore wish to consider the policy settings without assuming that tax eligibility alone makes a property financially suitable.
Current Rules Versus Rules From 1 July 2027
The practical difference between the current framework and the rules scheduled to apply from 1 July 2027 is primarily the way excess residential property deductions may be used. The result can depend on the category into which the property falls.
Current Treatment
Before 1 July 2027, an eligible net rental loss may generally be applied against other assessable income. If an investor earns $150,000 from employment and records an eligible $15,000 rental loss, taxable income may potentially be reduced to approximately $135,000 before other adjustments.
The investor still carries the actual cash-flow loss. The immediate tax effect may only partly offset that cost.
Affected Established Properties
From 1 July 2027, an investor holding an affected established residential property may generally be unable to use excess residential deductions to reduce unrelated income such as salary or wages.
Restricted losses may generally be carried forward and potentially applied against eligible residential property income or relevant residential capital gains in accordance with the legislation. The timing and value of the tax outcome may therefore differ from the current framework.
This may increase the importance of assessing whether the property can remain manageable without relying on an immediate tax adjustment. It may also affect the way some lenders recognise negative gearing benefits when calculating serviceability.
Grandfathered Properties
Qualifying residential properties held at 7:30pm AEST on 12 May 2026 are generally protected from the new negative gearing restrictions. Official guidance also addresses certain qualifying acquisition contracts entered into before the cut-off.
Grandfathering is linked to the legislation and the relevant property interest. Refinancing alone may not ordinarily remove the protection merely because the lender changes. However, a sale, transfer, ownership restructure or other transaction could produce different consequences.
Investors considering changes to ownership or debt arrangements may benefit from obtaining tax and legal advice before proceeding.
New Build Negative Gearing Versus Established Properties
The distinction between qualifying new residential builds and established housing is central to the reforms. However, tax treatment should be considered alongside purchase price, valuation, rental demand, construction risk and long-term marketability.
What May Qualify as a New Build?
Whether a property qualifies as a new residential build depends on the definitions and conditions in the legislation. A property should not be assumed to qualify merely because it is marketed as new, recently completed or sold off the plan.
Depending on the statutory requirements and the property’s history, potentially relevant property types may include:
- newly completed houses;
- new apartments or townhouses;
- certain off-the-plan acquisitions;
- qualifying newly created residential dwellings.
Occupancy history, construction timing, prior ownership, contractual arrangements and the nature of the development may be relevant. Written confirmation from a qualified tax adviser may be appropriate before relying on new-build treatment.
Potential Characteristics of New Builds
A qualifying new build may allow eligible rental losses to receive broader negative gearing treatment after 1 July 2027. Depending on the property, a new dwelling may also have modern features, lower initial maintenance requirements and access to eligible depreciation deductions.
These characteristics do not establish that the property is suitable. New properties can sometimes carry a price premium, and the initial contract price may not be supported by the lender’s valuation at settlement.
Potential Risks of New Builds
New residential property can involve risks that differ from those associated with established housing, including:
- construction or settlement delays;
- builder insolvency or contractual disputes;
- valuation shortfalls;
- defects or incomplete works;
- oversupply within a development or suburb;
- limited comparable sales evidence;
- uncertain resale demand.
An eligible tax treatment may not compensate for a weak location, excessive purchase price, low rental demand or poor construction quality. The property may still need to stand on its own financial and market fundamentals.
How Negative Gearing Changes May Affect Borrowing Capacity
Borrowing capacity is determined by lender policy rather than tax law alone. However, the tax treatment of rental losses can form part of some lenders’ serviceability calculations, so the reforms may influence how affected applications are assessed.
How Lenders Assess Borrowing Capacity
Lenders generally assess whether an applicant appears able to meet repayments while accounting for existing commitments and a higher assessment rate. Relevant factors may include:
- salary, wages and employment stability;
- self-employed or business income;
- rental and other investment income;
- living expenses;
- existing home loans and personal debts;
- credit card limits;
- dependants and household circumstances;
- the proposed loan term and repayment type.
A lender may shade rental income and variable earnings. Bonuses, overtime, commissions, contractor income and trust distributions may be accepted differently depending on their history, consistency and supporting evidence.
APRA Serviceability Buffers
The Australian Prudential Regulation Authority (APRA) requires authorised deposit-taking institutions to use prudent serviceability settings. APRA’s mortgage serviceability buffer currently remains at three percentage points above the applicable loan rate.
A borrower with an actual loan rate of 6.00%, for example, may be assessed at approximately 9.00%, subject to the lender’s assessment rate, floor and policy. The calculation is designed to test whether the borrower may be able to manage repayments if rates or expenses increase.
For a portfolio investor, the buffer may be applied across multiple existing and proposed debts. This can make assessed repayments considerably higher than the borrower’s current repayments.
Negative Gearing Add-Backs
Some lenders recognise part of the tax effect of negative gearing through servicing adjustments often described as negative gearing add-backs. The calculation can vary materially between lenders.
A lender may recognise an eligible tax benefit based on the applicant’s income and assessed property loss. Another lender may use a more conservative method or provide little recognition. From 1 July 2027, lenders may review how these calculations apply to affected established properties whose losses cannot generally offset unrelated income.
This does not mean borrowing capacity necessarily decreases for every investor. The outcome may depend on whether the property is grandfathered, whether it qualifies as a new build, the investor’s income, the size of the loss and the lender’s policy.
How Lenders Assess Negatively Geared Investment Properties
Tax treatment and lending treatment do not always move together. A property with a potentially useful deduction may still weaken serviceability if the lender uses reduced rent and high assessed repayments.
Rental Income Shading
Lenders commonly use less than the full gross rental income. They may also assess short-term accommodation, room-by-room rentals, commercial leases and related-party arrangements differently from a standard residential tenancy.
A strong advertised rental yield may therefore contribute less to borrowing capacity than an investor expects.
Variable and Self-Employed Income
Borrowers who rely on overtime, bonuses, commissions or business income may encounter different evidence requirements between lenders. Some lenders may use an average over two years, while others may consider a more recent period where the income appears sustainable.
A borrower with sufficient real-world cash flow may therefore receive different assessed borrowing limits from different institutions.
Debt-to-Income Ratios
Debt-to-income ratio (DTI) compares total debt with gross annual income. From 1 February 2026, APRA limits authorised deposit-taking institutions to allocating no more than 20% of new investor lending to loans with a DTI ratio of six times income or more. A separate 20% limit applies to owner-occupier lending.
A DTI ratio at or above six does not automatically prevent approval. However, an application may fall within a lender’s limited high-DTI allocation and could face tighter policy, reduced borrowing capacity or additional scrutiny.
Non-bank lenders may operate under different regulatory settings, but they still apply their own credit policies, funding requirements and risk limits.
Borrowers considering portfolio growth may find it useful to review available investment property loan options before committing to a purchase, particularly where lender treatment of rent, existing debt and tax benefits differs.
The Relationship Between Negative Gearing and Capital Gains Tax
Negative gearing concerns income and deductions during ownership, while Capital Gains Tax (CGT) generally concerns the tax treatment of a gain when a CGT event occurs. Investors often consider the two together, but they operate under different rules.
Before the new CGT provisions begin applying, eligible Australian resident individuals who have held a qualifying asset for at least 12 months may generally have access to the existing 50% CGT discount, subject to the applicable rules and their circumstances.
The CGT reforms became law with the negative gearing changes and are scheduled to apply from 1 July 2027. The existing 50% discount for individuals, trusts and partnerships is generally being replaced by cost-base indexation and a 30% minimum tax rate on capital gains, subject to the detailed legislation and available exceptions.
For assets held across 1 July 2027, the new treatment generally applies to gains accruing after that date. Transitional calculations may therefore be required rather than applying the new treatment to the entire ownership period.
Certain qualifying new residential dwellings and affordable housing may receive different treatment. Foreign residency, ownership structure, capital losses and other circumstances may also affect the result.
Because the CGT calculations are separate from lender servicing and can be technically complex, investors may benefit from obtaining qualified tax advice before selling, transferring or restructuring a property.
Practical Scenarios for Australian Property Investors
The following simplified scenarios show how acquisition timing, property type and lender policy may interact. They are illustrative only and do not constitute financial, tax or legal advice.
Scenario 1: Buying an Established Investment Property
Sarah is considering an established apartment in Sydney. The property is expected to produce a rental loss during the first few years because of interest, strata fees and other holding costs.
Because Sarah would acquire the property after 7:30pm AEST on 12 May 2026, it would not generally receive grandfathered negative gearing treatment. From 1 July 2027, excess deductions may generally be restricted from offsetting her employment income.
Sarah may therefore place greater emphasis on the property’s cash-flow shortfall, strata records, rental demand and her ability to hold the property without relying on an immediate tax adjustment.
Scenario 2: Buying a Newly Constructed Townhouse
Michael is considering a newly completed townhouse in a regional centre. If the property meets the legislated requirements for a qualifying new residential build, eligible rental losses may retain broader negative gearing treatment after 1 July 2027.
Michael still needs to consider the contract price, lender valuation, local supply, construction quality and tenant demand. A tax classification may support one part of the analysis but may not resolve concerns about value or market performance.
Scenario 3: Expanding an Existing Portfolio
James holds two investment properties and is considering a third. One existing property may be grandfathered, while the proposed purchase may be subject to the new rules.
His lender shades the rental income, applies assessment buffers to all loans and calculates a DTI ratio above six. Although the proposed property may be manageable in his personal budget, the application may still exceed the lender’s serviceability limit.
James may need to compare lender policies, reconsider the proposed loan size or delay the purchase. Selling or refinancing an existing property could have tax and transaction-cost consequences that require separate advice.
Potential Risks and Trade-Offs
The tax reforms change one part of the investment equation. They do not remove the underlying risks of borrowing to purchase residential property.
Cash-Flow Risk
A negatively geared property requires the investor to fund the difference between income and expenses. A restricted or delayed tax benefit may increase the amount that needs to be carried from salary, business income or savings.
Interest Rate Risk
Higher interest rates may increase both actual repayments and lender-assessed repayments. Investors using interest-only loans may also face higher payments when the interest-only period ends.
Vacancy and Expense Risk
Rental income may fall below expectations because of vacancy, tenant turnover or market conditions. Repairs, insurance, strata levies and land tax may also increase.
Policy and Tax Risk
The 2026 reforms demonstrate that tax settings can change. Future amendments, ATO guidance or judicial interpretation could affect how particular arrangements are treated.
Valuation and Market Risk
A lender’s valuation may be lower than the contract price, particularly for off-the-plan purchases or properties in developments with limited comparable sales. Lower values may require a larger deposit or affect refinancing options.
How Investors May Prepare for the Changes
Preparation does not necessarily require an immediate property transaction. A review of cash flow, borrowing capacity, ownership records and loan purpose may help identify where the new rules could be relevant.
Confirm the Property Category
Investors may wish to establish whether a property is grandfathered, an affected established property or a potentially qualifying new build. Acquisition contracts and settlement documents should be retained.
Test the Investment Without an Immediate Tax Offset
Modelling the property without an immediate deduction against salary may provide a more conservative view of the required cash flow. Investors may also test higher interest rates, lower rent and unexpected expenses.
Review Loan Structure and Purpose
Clear loan splits and transaction records may help distinguish investment borrowings from private debt. Refinancing, redraws and loan increases should be considered carefully because deductibility generally follows the use of funds.
Review Borrowing Capacity Before Committing
A lender assessment before signing an unconditional contract may help identify serviceability, DTI, valuation or policy constraints. Borrowing estimates can change when an additional property’s rent, debt and expenses are included.
Monitor Implementation Guidance
The reforms are law, but investors may still need to monitor ATO and Treasury guidance about definitions, record-keeping and transitional treatment. The property investor budget reforms article provides additional context on the 2026–27 Budget announcement and related policy package.
Decision Framework for Evaluating an Investment Property
A property may be assessed more effectively by separating its tax position from its cash flow, lending position and underlying quality. The following questions may help organise that review.
- Does the property appear manageable without relying on an immediate negative gearing benefit?
- How much rent is the lender likely to recognise for serviceability?
- What happens to the cash flow if rates, strata fees or maintenance costs increase?
- Does the property qualify as grandfathered or as a new residential build under the legislation?
- How does the proposed debt affect the borrower’s DTI ratio and future borrowing plans?
- Is the contract price supported by comparable sales and likely lender valuation?
- Does the property have sustainable tenant demand beyond any tax treatment?
- Would the investment still align with the borrower’s objectives if capital growth were slower than expected?
This approach may help prevent tax treatment from becoming the sole reason for a purchase. A potentially favourable deduction cannot correct an unsuitable loan, weak cash flow or an overpriced property.
Conclusion
The negative gearing reforms are now law and are scheduled to apply from 1 July 2027. Qualifying properties held at the Budget-night cut-off are generally protected, while affected established properties acquired later may face restrictions on using excess deductions against unrelated income. Qualifying new builds may retain broader negative gearing treatment.
The practical decision remains wider than tax. Investors may need to consider actual cash flow, lender-recognised rent, serviceability buffers, DTI limits, loan purpose and property fundamentals together. Confirming the tax category with a qualified adviser and testing the lending position before committing may provide a clearer basis for evaluating an investment.
This article contains general information only and does not constitute financial, tax or legal advice. The negative gearing and CGT reforms discussed became law on 26 June 2026 and are scheduled to apply from 1 July 2027. Tax outcomes, borrowing capacity, lending decisions and investment performance depend on individual circumstances, lender policies, market conditions and the application of current legislation. Readers should obtain qualified tax, legal and financial advice before making property or borrowing decisions.
Frequently Asked Questions (FAQs)
1. What is negative gearing?
Negative gearing generally occurs when eligible expenses associated with an income-producing property exceed its assessable rental income. Before 1 July 2027, an eligible net rental loss may generally be offset against other assessable income, subject to the ordinary tax rules and the investor’s circumstances.
2. What are the negative gearing changes?
The reforms generally limit broader negative gearing treatment for residential properties acquired after the grandfathering cut-off to qualifying new residential builds. For affected established properties, excess residential deductions may generally be restricted from offsetting unrelated income from 1 July 2027.
3. When do the new negative gearing rules apply?
The reforms became law on 26 June 2026 and are scheduled to apply from 1 July 2027. However, the relevant grandfathering cut-off was 7:30pm AEST on 12 May 2026.
4. Are existing investment properties grandfathered?
Qualifying residential properties held at 7:30pm AEST on 12 May 2026 are generally exempt from the new negative gearing restrictions. Official rules also address certain qualifying acquisition contracts entered into before the cut-off. Individual eligibility may depend on the ownership and transaction details.
5. What is new build negative gearing?
New build negative gearing describes the continuation of broader negative gearing treatment for residential properties that meet the legislated new-build requirements. A recently completed or off-the-plan property should not automatically be assumed to qualify.
6. Could the changes affect borrowing capacity?
They could affect some borrowers because certain lenders recognise negative gearing benefits in their serviceability calculations. Any effect may depend on the property category, the assessed rental loss, the borrower’s income and liabilities, and the lender’s policy.
7. Should an investor buy a new property rather than an established property?
There is no single property type that is suitable for every investor. A new build may receive different tax treatment, while an established property may offer different pricing, location, rental or resale characteristics. The decision may depend on cash flow, borrowing capacity, risk tolerance, property fundamentals and professional tax advice.