Key takeaways:
- Negative gearing for established residential properties will be abolished from 1 July 2027 for properties purchased after 7:30pm on 12 May 2026.
- Investors affected by the changes will no longer be able to offset rental losses against salary or other personal income. Instead, losses can only be offset against residential rental income or future capital gains from rental properties.
- Existing property owners, including those already under contract before the announcement, are grandfathered and can continue to access negative gearing under the current rules.
- Eligible new builds will remain exempt, with investors still able to access both negative gearing and the 50% CGT discount.
The Federal Budget introduces significant reforms to negative gearing for residential property investors, removing access to these tax benefits from 1 July 2027 for established properties purchased after 7:30pm on 12 May 2026.
These measures aim to moderate property price increases, thereby improving affordability and assisting first-home buyers in entering the market.
How does the existing approach work?
‘Negative gearing’ allows property investors to offset net rental losses from their residential property investments against other forms of income.
If a rental property’s costs (e.g. loan interest, maintenance and rates) exceed the rental income it generates, resulting in a loss, this loss could reduce the investor’s overall taxable income and lower their tax bill. This generally encouraged leveraged property investment, due to the tax advantages provided from negative gearing and the 50% Capital Gains Tax discount.
What’s changing and how does it work?
From 1 July 2027, negative gearing has been abolished for all ‘established’ residential properties purchased from 7:30pm on 12 May 2026. Impacted residential property investors will no longer be able to offset rental losses against other income (e.g. salary and wages).
Instead, residential rental losses can only be deducted from either:
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- Residential rental income (including those from other rental properties (i.e. where multiple rental properties are owned)); or
- Capital gain arising from the sale of a rental property.
In the event the rental losses exceed the above income types, the excess losses can be carried forward to future years.
Importantly, properties that are currently held as at 7:30pm on 12 May 2026 (including those ‘under contract’ awaiting settlement) can continue to be negatively geared until they are sold. This provides protection for investors who have made decisions based on the current legislation. For properties purchased after this date, negative gearing will only apply until 30 June 2027.
Eligible ‘new build’ residential properties remain exempt from these changes. For these properties, both negative gearing and the existing capital gains tax discount of 50% will still be available. Furthermore, properties in widely held trusts and superannuation funds will be exempt from these changes, in addition to targeted exemptions for ‘build-to-rent’ developments and private investors supporting Government Housing programs.
Easier or more complex?
The reforms will introduce additional complexity for property investors by creating a dual system with rules that vary depending on the property type and purchase date. This shift is likely to increase administrative and compliance responsibilities for investors, who need to now:
- Track the purchase date of each property to determine the treatment and applicability of negative gearing.
- Calculate rental losses for established properties purchased after the cut-off and ensure these are only offset against future residential property income or capital gains arising from rental properties, rather than other income sources.
- Carry forward any excess rental losses to future years for impacted properties, requiring ongoing record-keeping.
Further, investors will need to consider if a property is a ‘new build’ property that ‘genuinely’ adds to housing supply before making their investment.
What qualifies as a new build?
Based on current guidance, eligible new builds include:
- A newly constructed apartment bought off-the-plan.
- A duplex constructed through a knock-down rebuild replacing a single, free-standing house (i.e. a net increase in the number of residential properties).
- Any residential construction on previously vacant land.
- A newly built property which is occupied for less than 12 months before being first sold.
This would exclude the following types of properties from the definition of new build:
- An established property that has recently been extended to add additional bedrooms.
- A free-standing house constructed through a knock-down rebuild replacing an older, smaller free-standing house.
- A granny flat built adjacent to an established property that is not eligible for negative gearing.
- A newly built property which is occupied for more than 12 months before being sold to a subsequent investor.
William Buck insights
Investors who currently own a negatively geared residential property will continue to enjoy the tax benefits described above. These property owners may be less inclined to sell their residential investment property.
Although the changes may seem inequitable to those now unable to take advantage of these tax benefits, the number of negatively geared properties will reduce over time as rental income increases and debt is paid down, thereby reducing the deductible interest cost. Accordingly, this tax treatment mismatch should reduce over time.
Interest costs on borrowing funds to acquire property are a key driver of net rental losses. Many investors have historically opted for interest only loans to maximise interest deductions, however this strategy may no longer be effective for purchases of existing residential premises.
For those seeking to invest in the residential property market, existing residential property is now less attractive from a tax perspective. As outlined above, investors who purchase a property that meets the definition of a new build will continue to have access to negative gearing and also the ability to choose either the 50% CGT discount or indexation and the minimum tax when they sell the property. This may motivate investors to focus on acquiring new builds or transforming existing properties to meet the new build criteria, thereby unlocking these tax benefits. Accordingly, the definition of new builds as explained above will be critical. This definition potentially encourages the conversion of larger residential lots into smaller subdivided lots, resulting in greater housing density.
Commercial property may also emerge as an attractive alternative for property investors, as it appears to remain unaffected by the negative gearing tax reforms.
Ultimately the changes result in greater complexity for residential property investors, who will need to consider long-term investment models to determine how to increase their after-tax returns on any residential property investment.
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