Negative Gearing is Changing: How the New Rules Could Affect Property Investors

The Government’s changes to negative gearing for residential property have now become law.

From 1 July 2027, rental losses from many established residential properties acquired after Budget night will no longer be immediately deductible against salary, business income or other investment income.

Instead, affected rental losses will generally be quarantined and carried forward for use against certain residential property income or gains.

The changes may significantly affect the cash flow and after-tax cost of purchasing an established investment property.

Which properties are affected?

The new rules generally apply to an interest in an established residential dwelling acquired after 7:30 pm AEST on 12 May 2026.

The relevant date is when the property interest was acquired, not when the new rules commence.

This means a property acquired after Budget night may be affected even though the rental loss restrictions do not commence until 1 July 2027.

Residential property acquired before the Budget night cut-off will generally remain subject to the existing negative gearing rules.

What does quarantining a rental loss mean?

A rental property is negatively geared when the deductible expenses of owning the property exceed the rental income earned.

These expenses may include:

• Loan interest

• Property management fees

• Council and water rates

• Insurance

• Repairs and maintenance

• Depreciation and capital works deductions

Under the current rules, an eligible rental loss can generally be deducted against other assessable income, including salary and wages.

Under the new rules, a loss from an affected established residential property will generally be quarantined.

The loss is not permanently lost. It will instead be carried forward and may generally be used against:

• Net income from eligible residential properties

• Certain capital or revenue gains arising from residential property

The quarantined loss will generally not be available to reduce tax on salary, business income, dividends, interest or commercial property income.

A simple example

Assume an individual earns a salary of $180,000 and purchases an established investment property after Budget night.

During the year, the property produces:

• Rental income of $35,000

• Deductible interest and other expenses of $55,000

• Net rental loss of $20,000

Under the current rules, the $20,000 rental loss could generally be deducted against the individual’s salary and other assessable income.

Under the new rules, the $20,000 loss would generally be quarantined. It would not immediately reduce the individual’s taxable salary.

The loss would instead be carried forward for possible use against future eligible residential property income or gains.

This may significantly increase the annual after-tax cash cost of owning the property.

Existing properties are generally grandfathered

Residential property interests acquired before 7:30 pm AEST on 12 May 2026 will generally continue to qualify for negative gearing under the existing rules.

This means eligible losses from an existing property may continue to be deductible against salary, business income and other assessable income.

However, care will be required where the ownership of an existing property changes after the cut-off date.

Transactions that may need to be reviewed include:

• Transferring a property to a spouse

• Changing ownership percentages

• Adding or removing an owner

• Transferring a property into a trust or company

• Changing joint tenancy or tenancy-in-common interests

• Undertaking a family or estate planning restructure

A change in the legal or beneficial ownership of a property may cause some or all of the interest to be treated as newly acquired and potentially lose its grandfathered treatment.

Advice should therefore be obtained before making any ownership changes.

New residential dwellings may still qualify

The restrictions are primarily directed at established residential property.

Eligible new residential dwellings may continue to qualify for negative gearing treatment. This is intended to encourage investment that adds to Australia’s housing supply.

Whether a property qualifies as a new residential dwelling will depend on the detailed requirements.

A newly constructed property may qualify, while a substantially renovated property or replacement dwelling may not necessarily qualify merely because it appears new.

For example, replacing one demolished home with two separately titled dwellings may potentially add to housing supply and qualify, subject to the applicable requirements.

Investors should confirm the property’s eligibility before relying on continued negative gearing treatment.

Other negatively geared investments are not affected

The new restrictions apply specifically to residential property.

The existing rules for other negatively geared investments, such as shares and commercial property, remain unchanged.

Interest on borrowings used to acquire income-producing shares may continue to be deductible under the ordinary rules, provided the borrowed funds can be clearly traced to the investment and the shares are expected to produce assessable income.

This may include funds redrawn from a home loan and used directly to purchase shares. The key consideration is how the borrowed money is used, rather than which asset secures the loan.

Care should be taken where a loan or redraw facility contains a mixture of private and investment expenditure, as the interest may need to be apportioned.

Investment structures may still play an important role

Many of our clients already invest in property through entities such as discretionary trusts or companies.

These structures generally do not provide the same immediate negative gearing benefit as holding a property personally.

For example, a rental loss incurred by a discretionary trust generally remains within the trust and cannot be used to reduce an individual beneficiary’s salary or other personal income. Similarly, company losses generally remain within the company and are carried forward, subject to the relevant loss rules.

However, the absence of an immediate negative gearing benefit does not necessarily mean an entity structure is unsuitable.

Depending on your circumstances, purchasing through an entity may provide benefits such as:

• Asset protection

• Flexibility over the distribution of future income

• Estate and succession planning advantages

• Separating investment activities from personal affairs

• Preserving personal taxable income

• Potentially reducing the impact of property losses on future borrowing assessments

This last point can be particularly important.

A heavily negatively geared property held personally may reduce taxable income and can affect how some lenders assess borrowing capacity. An appropriately structured entity investment may produce a different outcome, although lenders will still consider guarantees, existing debts, cash flow and the overall financial position of the group.

There is no single structure that is right for every property investor. The appropriate structure will depend on factors including:

• Your age and stage of life

• Current and expected future income

• Borrowing plans

• Asset protection requirements

• Estate planning objectives

• Intended holding period

• Expected rental income and capital growth

• Your broader family and investment goals

The structure should be considered before signing a contract. Restructuring a property after it has been acquired can result in capital gains tax, transfer duty, refinancing costs and other unintended consequences.

Mixed property portfolios will require closer tracking

Investors who own a mixture of established dwellings, new dwellings and commercial properties may need to separately track income and expenses for each category.

This is because the quarantining rules are specifically targeted at residential dwellings.

They do not generally apply in the same way to:

• Shares

• Commercial property

• Industrial property

• Business investments

• Other non-residential assets

Careful records will be required to track:

• Which properties are grandfathered

• Which properties are subject to quarantining

• Carried-forward rental losses

• Income against which the losses can be used

• Losses applied against a future residential property gain

What should property investors do now?

Before purchasing an investment property, investors should model the position both before and after tax.

This should include consideration of:

• Whether the property is established or qualifies as a new dwelling

• The expected annual cash shortfall

• Whether rental losses will be immediately deductible

• The investor’s borrowing capacity and interest rate exposure

• Land tax and asset protection considerations

• The most appropriate ownership structure

• The intended holding period

• The eventual capital gains tax consequences

A property that appears affordable after taking negative gearing benefits into account may require substantially more cash funding if those losses are quarantined.

Proposed minimum tax for discretionary trusts

The Government has also proposed a separate 30 per cent minimum tax for discretionary trusts.

The proposal is not yet law and the final details remain uncertain.

This measure may be particularly relevant to property investors and family groups that hold investments or businesses through discretionary trusts.

We are monitoring the proposal closely. Once the final rules are released, we will contact affected clients to discuss whether restructuring or other action may be required.

We are here to help

The new negative gearing rules will affect the cash flow, ownership structure and long-term tax outcomes of many residential property investments.

If you are considering buying, selling or transferring an investment property, please contact our office before proceeding. This is particularly important if you are deciding whether to purchase personally, jointly, through a trust or through a company.

We are here to help you assess the tax consequences, model the likely cash flow, consider the impact on your future borrowing capacity and determine the most appropriate structure having regard to your age, circumstances and longer-term goals.