Insights

Negative gearing – long regarded as a cornerstone of residential property investment in Australia – has not been abolished, but it has been fundamentally redefined. When combined with proposed changes to capital gains tax (CGT), the long-standing economics of leveraging into residential property will look materially different over the coming decade.

Importantly, these measures are not yet law. They remain subject to consultation and parliamentary approval. That said, the Government’s policy direction is now clear.

What has changed?

From 1 July 2027, negative gearing will be restricted under the following framework:

• Established residential properties acquired after 7:30pm (AEST) on Budget night (12 May 2026) will no longer allow net rental losses to be deducted against salary or other unrelated income.
• Rental losses on these properties will instead be:
  • Offset only against future rental income from residential property; or
  • Carried forward and applied against future capital gains from residential property.
• New residential builds (including off-the-plan and newly constructed dwellings) will remain eligible for full negative gearing.
• Existing investment properties held at Budget night are fully grandfathered, retaining current negative gearing treatment until they are sold.

For many long-standing investors, this final point is critical. There is no change to the tax treatment of established investment properties acquired prior to Budget night. As the loss can offset future income or capital gains they are not lost but merely deferred till the property becomes positively geared or is sold.

Why is the Government doing this?

Treasury modelling and Budget commentary point to a clear set of objectives:

• Reducing investor demand for existing housing stock
• Redirecting capital toward new housing supply
• Improving affordability for first home buyers
• Reducing long-term revenue leakage from highly leveraged, loss-making strategies

The Government estimates these changes could see around 75,000 dwellings transition from investors to owner-occupiers over the next decade, while also materially improving the Budget position over the medium term.

In short, the policy is designed to reshape where investors allocate capital, rather than eliminate property investment altogether.

What does this mean for property investors?

From a planning perspective, negative gearing will increasingly become a property-specific strategy rather than a broad personal tax offset.

For established properties acquired after Budget night:

• Highly leveraged, low-yield strategies become significantly less effective.
• Reliance on annual tax refunds to support cashflow is removed.
• Investors may need to prioritise neutral or positive cashflow from day one.
• Property selection and holding costs matter far more than they have historically.

For new builds:

• The continued availability of negative gearing, combined with depreciation benefits, makes new construction structurally more attractive.
• This may place upward pressure on prices in certain new-build and off-the-plan segments.
• Construction quality, delivery risk and location fundamentals become even more important.

The government plans for this to drive investment into new builds which on the surface is attractive but tax is only one component. Build costs of new properties are increasing and it may drive down the relative value of existing properties making them more attractive especially if you aren’t negatively gearing.

Interaction with Capital Gains Tax changes

Negative gearing cannot be viewed in isolation.

From 1 July 2027, the Government proposes replacing the current 50% CGT discount for individuals and trusts with:

• Inflation-adjusted cost base indexation; and
• A 30% minimum tax rate on real capital gains

Transitional rules apply:

• Capital gains accrued up to 30 June 2027 retain the 50% discount.
• Gains accrued after that date fall under the new regime.

Taken together, these reforms materially reduce the long-term tax advantage of holding loss-making property purely for capital growth, particularly where you rely on growth significantly exceeding inflation.

What should you do next?

While existing arrangements are largely protected through grandfathering, the combined changes to negative gearing and capital gains tax will shape future investment decisions and portfolio structure.

If you are considering buying, selling or restructuring property investments over the coming years, it is important to assess how these changes interact with your broader financial strategy – including cashflow, tax, retirement planning and diversification.

We recommend speaking with your adviser to understand how these reforms apply to your specific circumstances and to model the implications before making any decisions.

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