Negative Gearing Limits 2027: What Investors Lose

The negative gearing changes announced in the 2026 Budget are the most significant proposed restriction on residential property investment in Australia’s recent tax history — as proposed, and subject to passage of enabling legislation. Delivered on 12 May 2026, the 2026-27 Federal Budget proposes that from 1 July 2027, investors who purchase established residential property after 7:30pm AEST on Budget night will no longer be able to offset rental losses against their salary or business income. The cut-off is midnight-clear: existing property holders are grandfathered indefinitely, new builds remain fully exempt, and the change affects only established dwellings acquired from this point forward. Whether the proposal survives Parliament in its current form is a different question entirely — this is arguably the most politically contested element of the entire Budget package.

Disclaimer: This article provides general information only and does not constitute tax advice or financial advice. Tax treatment of investment property is fact-specific and can be complex. Consult a registered tax agent and a licensed financial adviser for advice tailored to your circumstances. The proposals described here are subject to passage of enabling legislation and may change.

What the 2026-27 Budget Proposes

According to Budget Paper No. 2 (2026-27), the Government proposes to restrict negative gearing on established residential properties acquired after 7:30pm AEST on 12 May 2026. The commencement date for the new rules is 1 July 2027 — meaning there is a transitional window of roughly thirteen months between the grandfathering cut-off and when the new tax treatment actually kicks in.

The mechanics of the proposed change are important to understand precisely. Negative gearing itself is not being abolished. What changes is where the losses can be applied. Under current law, if your investment property generates a rental loss — your interest, rates, repairs, and other costs exceed your rental income — you can deduct that loss against any other income: salary, freelance revenue, business income, or investment income from elsewhere. The loss offsets your total taxable income and reduces your overall tax bill.

Under the proposed new rules, for affected properties, that same rental loss can only be offset against rental income from other properties you hold, or against capital gains. It cannot reduce your salary or other personal income. The deduction is not permanently lost — it carries forward and can be used in future years when you have rental income or a capital gain. But the immediate tax benefit that makes negative gearing attractive to most PAYG investors — the in-year reduction in income tax — disappears for newly acquired established dwellings.

New builds are explicitly carved out of these restrictions. According to Budget Paper No. 2 (2026-27), investors who purchase newly constructed residential property will retain full negative gearing treatment regardless of when they acquire it. The Government’s stated rationale is to preserve the incentive to increase housing supply while reducing the tax advantage that currently drives competition for existing stock.

Who’s Affected (and Who Isn’t)

Property investors who buy established residential property after 12 May 2026 — affected

If you exchange contracts on an existing house, unit, or apartment after 7:30pm AEST on Budget night — even during the transitional period before 1 July 2027 — the new rules will apply to that property from 1 July 2027 onwards. During the 2026-27 financial year (before commencement), existing rules apply. From 1 July 2027, the restricted loss-offsetting rules kick in for that property.

The precise legal definition of “established residential property” matters here and will be confirmed in the enabling legislation. In general, expect it to follow the existing GST definition: property that has previously been sold as residential premises, as distinct from newly constructed dwellings being sold for the first time. Off-the-plan contracts where the building is not yet constructed should fall into the new-build exemption — but get legal and tax advice before assuming this applies to your specific situation.

Investors who held property at 7:30pm on 12 May 2026 — grandfathered, no change

If you were already the registered owner of an investment property at 7:30pm AEST on Budget night, your negative gearing treatment is unaffected — indefinitely. You continue to deduct rental losses against your total income under the existing rules. There is no proposal to retrospectively change the treatment of existing portfolios, and the Budget paper makes this explicit. If you’ve been a property investor for years and your portfolio was settled before tonight, nothing changes for you.

Buyers of new builds — explicitly exempt

Investors purchasing newly constructed residential property are outside the scope of the proposed restrictions entirely. Full negative gearing against general income is retained for new-build acquisitions regardless of when you buy. This exemption applies whether you buy off the plan, from a developer on completion, or as the first purchaser of a newly finished dwelling. The policy intent is to direct investor capital toward construction rather than existing stock.

Commercial property investors — not in scope of these residential rules

The proposed restrictions apply specifically to residential property. Commercial property — offices, retail premises, industrial sheds, warehouses — is not affected by these measures. If your investment portfolio is weighted toward commercial real estate, nothing about your gearing treatment changes. The ATO confirms that rental property tax rules have always distinguished between residential and other investment property in various respects; this Budget measure follows that existing boundary.

Why the Government Is Proposing This

The Government’s stated rationale, as set out in the Budget papers, is twofold: housing affordability and revenue.

On housing, the argument is that negative gearing creates a structural tax advantage for investors purchasing existing dwellings over owner-occupiers purchasing their first home. By removing that advantage for established residential purchases — while preserving it for new builds — the Government aims to tilt investor demand away from existing stock and toward construction, which increases supply. Whether this actually improves affordability at the scale required is a contested empirical question; Treasury’s own modelling has historically been cautious about the magnitude of any effect.

On revenue, restricting negative gearing for new established-property buyers raises significant money for the Budget. The deferred — rather than eliminated — nature of the losses (they carry forward, not disappear) reduces the long-run cost, but the in-year revenue gain is real and material. This is a significant Budget measure, not a token policy gesture.

What Changes for Tax Returns

A worked example makes the difference concrete.

Suppose an investor — call them Alex — purchases a $750,000 established investment unit on 15 July 2026. That is after Budget night but before the 1 July 2027 commencement date.

FY2026-27 (existing rules still apply): Alex’s annual rental income is $32,000. Interest, rates, property management fees, insurance, and repairs total $52,000. The rental loss is $20,000. Under current law, Alex deducts that $20,000 against their $130,000 salary, reducing taxable income to $110,000 and saving approximately $7,400 in income tax.

FY2027-28 onwards (new rules apply to this property): Same numbers. Same $20,000 loss. But now that loss cannot reduce Alex’s salary income. It can only offset rental income from other properties Alex holds, or a capital gain when Alex eventually sells. If Alex has no other rental income and no capital gain that year, the $20,000 loss carries forward to a future year. The immediate $7,400 tax saving disappears — it doesn’t vanish forever, but it’s deferred indefinitely until Alex has offsetting rental income or a gain.

For investors who hold a portfolio with multiple properties, the loss-ring-fencing can be partially mitigated: losses on the new established property can offset gains on others. But for the typical single-investment-property buyer who relies on the annual tax saving to make the cash flow work, the impact is material and immediate from 1 July 2027.

Keep meticulous records. Every repair call-out, every agent invoice, every insurance renewal, every rates notice — all of it feeds into the deductible loss calculation. If losses are being carried forward rather than applied immediately, you want clean documentation going back to the day of settlement. An investment property visit to inspect maintenance work or meet your property manager is also a deductible travel expense — see our vehicle and travel expense deductions guide for how to record those correctly.

Action for Existing Investors (Pre-Budget-Night Holders)

If your investment property — or properties — were already settled before 7:30pm AEST on 12 May 2026, the practical answer is straightforward: nothing changes. Your current negative gearing treatment is grandfathered. You do not need to restructure, refinance, or reconsider your portfolio strategy in response to this Budget measure.

The temptation to panic-sell or restructure a perfectly functional investment portfolio based on a change that doesn’t apply to you is real — it tends to spike whenever negative gearing reform is in the news. Resist it. Selling a property generates capital gains tax consequences (subject to the Budget’s proposed CGT changes discussed below) and transaction costs that typically dwarf any tax exposure you might be trying to avoid from a change that isn’t actually affecting you.

If you want a structural review of whether your property investment sits within the right entity — individual ownership versus a company or trust — that conversation is always worth having with a tax agent, independently of this Budget measure. Our sole trader vs company guide covers the general trade-offs for business income, and the same structural considerations apply to investment assets.

Action for Investors Considering Purchases Now

If you were already planning to buy an established investment property and haven’t yet exchanged, you’re now in a meaningfully different situation. The tax treatment of any established property you buy from this point forward will be restricted from 1 July 2027. Before proceeding:

• Get tax and financial advice before transacting. The interaction between the new negative gearing rules, the proposed CGT changes, and your personal income and tax position is fact-specific. A registered tax agent and a licensed financial adviser — ideally working together — can model your actual after-tax position. For connections to qualified accountants, Taxr for accountants lists professionals familiar with investment property tax.

• Compare new-build versus established property treatment. New builds retain full negative gearing. If your investment thesis is primarily tax-driven, a new build may now be a structurally better outcome than an established dwelling of similar price. Compare yields, growth expectations, and total return — not just the gearing treatment — but factor the tax difference into your modelling.

• Model cash flow with the restricted gearing assumption. Run the numbers assuming the annual rental loss cannot offset your salary. Can the property sustain itself — or absorb the shortfall from your after-tax cash flow — without the in-year tax saving? If it can’t, the investment’s viability depends on assumptions about rental growth, capital appreciation, or other factors that carry their own uncertainty.

• Don’t make property decisions on tax alone. This bears repeating. Property decisions driven primarily by tax timing rarely produce the best outcomes — the property’s fundamentals (location, yield, capital growth prospects, vacancy risk) matter far more than any single gearing treatment. The grandfathering cut-off creates a perception of urgency that deserves scepticism.

Also worth reviewing: for the investment property you do hold, every legitimately deductible expense matters more when the tax benefit of losses is deferred rather than immediate. The losses still count — they carry forward and will eventually offset something — so maintaining complete records is just as important as before.

Interaction with CGT Reform

The negative gearing changes don’t land in isolation. The same Budget proposes replacing the 50% capital gains tax discount on residential property with an indexation-based method, effective from 1 July 2027.

Under current law, if you hold an investment property for more than 12 months and sell it, you pay tax on only 50% of the capital gain. The Budget proposes replacing this with indexation — adjusting the cost base for inflation and taxing only the real (inflation-adjusted) gain, with a 30% minimum tax rate applying where indexation would otherwise produce a lower effective rate.

Both reforms hit the same investment simultaneously from 1 July 2027: restricted loss-offsetting on the way in, and a changed CGT treatment on the way out. For an investor buying an established property now, both elements of the Budget’s property tax package apply. Full analysis of the CGT reform — including how it interacts with properties held at different cost bases — is in our companion post on CGT indexation and the 30% minimum rate from 2027.

Risk: This Is Politically Sensitive

Let’s be direct about something that most Budget coverage underplays: negative gearing reform is one of the most politically contentious tax questions in Australia. The policy debate stretches back decades. Multiple governments have proposed changes; multiple proposals have either been abandoned before legislation or substantially amended in the Senate.

The negative gearing changes announced on 12 May 2026 are no different in that respect. They require enabling legislation to pass both Houses of Parliament. The Senate arithmetic at the time of writing is not certain, and this measure — more than almost any other in the Budget — is a candidate for significant amendment or a phased-in compromise before it becomes law.

This post describes what the Budget proposes, not what the law currently is. That distinction matters for decisions you’re making right now. If you are considering a property transaction in the next twelve months, do not make an irreversible decision based on the assumption that the Budget measure will pass exactly as announced. Watch the legislative process. We will update this post as the bill is introduced, debated, and either passed or amended.

Updates

12 May 2026 — Initial publication based on Budget Paper No. 2 (2026-27). Proposals subject to passage of enabling legislation.

Frequently Asked Questions

When do the negative gearing changes take effect?

From 1 July 2027, as proposed in Budget Paper No. 2 — subject to passage of enabling legislation. The grandfathering cut-off is 7:30pm AEST on 12 May 2026 (Budget night). Properties purchased after that cut-off but before 1 July 2027 will be subject to the new rules from commencement, but governed by existing rules during FY2026-27.

Are existing rental properties affected?

No. Properties held at 7:30pm on 12 May 2026 are grandfathered indefinitely. The new rules apply only to established residential properties purchased after Budget night. There is no proposal for retrospective application to existing portfolios.

Do new builds still allow negative gearing?

Yes. New builds are explicitly outside the new restrictions. Investors can continue to offset losses on new-build residential property against general income — including salary and business income — regardless of when the property is acquired. This carve-out is a deliberate policy choice to maintain the incentive to invest in new housing construction.

What does the change actually do?

For affected properties, rental losses can only offset rental income or capital gains, not other personal income (salary, business income). The deduction isn’t lost — it carries forward and can be applied in a future year when you have rental income or a capital gain. But the immediate in-year tax reduction against salary income that makes negative gearing valuable to most investors is removed for newly acquired established dwellings.

Will the changes be retrospective?

No. The Budget paper explicitly grandfathers all properties acquired before 7:30pm on Budget night. Retrospective application of negative gearing changes is not proposed. If you already hold investment property, your current tax treatment is unaffected.

Should I rush to buy before 1 July 2027?

Not without independent advice. Property decisions driven primarily by tax timing rarely work out — the property’s fundamentals matter far more than gearing treatment. The commencement date of 1 July 2027 is not the relevant deadline anyway; the grandfathering cut-off for established properties was 7:30pm AEST on 12 May 2026. If you are considering purchasing an established property, consult a registered tax agent and a financial adviser to model your actual position under the proposed new rules. For sole traders and business owners considering their first investment property, the interaction with business income is an important part of that modelling.

Whatever shape the negative gearing changes take, clean property records save you in audit defence. Taxr keeps every property-related expense — repairs, agent fees, insurance, depreciation invoices — categorised and exportable to your accountant. Download Taxr and stop losing receipts.