Negative Gearing Changes 2026: Before and After Budget Night – What Property Investors Need to Know

Australia's negative gearing rules are changing from 1 July 2027. Here's how the reforms affect existing investment properties, new purchases and future tax deductions.

Negative gearing has long been an important tax consideration for Australian property investors. It allows eligible investors to offset rental property losses against other taxable income, including salary and wages.

However, the Australian Government announced major changes to negative gearing in the 2026–27 Federal Budget, introducing restrictions for certain residential investment properties purchased after Budget Night.

The changes are particularly important for investors purchasing established residential properties after 7:30 pm AEST on 12 May 2026.

The core reforms have since passed Parliament and received Royal Assent on 26 June 2026 (Treasury Laws Amendment (Tax Reform No. 1) Act 2026, Act No. 49, 2026), with the new restrictions applying from the 2027–28 income year, starting on 1 July 2027.

In this article, we explain what negative gearing is, what changed on Budget Night, how existing properties are treated and what investors should consider before purchasing another investment property.

What is negative gearing?

Negative gearing occurs when an investment property's deductible expenses exceed the rental income it generates, resulting in a net rental loss.

Common deductible expenses may include:

• Interest on loans used to purchase the investment property
• Council rates and water charges
• Property management fees
• Landlord insurance
• Eligible repairs and maintenance
• Depreciation and capital works deductions, where applicable

For example, suppose an investment property generates $30,000 in annual rental income but incurs $40,000 in deductible expenses.

The property produces a net rental loss of $10,000.

Under the existing negative gearing arrangements, an eligible investor can generally offset this loss against other taxable income, such as salary or business income, reducing their overall tax liability.

The Australian Taxation Office explains the treatment of rental income and deductions in its Residential Rental Properties guidance.

What changed on Budget Night 2026?

On 12 May 2026, the Australian Government announced reforms to negative gearing and capital gains tax as part of the 2026–27 Federal Budget.

The negative gearing reforms are intended to direct tax incentives towards investment in newly constructed housing while preserving existing arrangements for properties held before the Budget Night announcement.

Under the changes:

• Residential investment properties held before 7:30 pm AEST on 12 May 2026, including those under contract but not yet settled, are generally grandfathered.
• Established residential properties bought after the cutoff can still be negatively geared until 30 June 2027. From 1 July 2027, investors generally cannot offset net rental losses on these properties against salary and other non-residential-property income.
• Eligible newly built residential properties can continue to benefit from negative gearing.
• Restricted rental losses may be used against eligible income and gains from residential property, subject to the legislative calculation rules, or carried forward to future income years.

The changes are set out in the Australian Government's 2026–27 Budget tax explainer and on the ATO's tax reform page.

The legislative framework is contained in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which introduces section 26-155 into the Income Tax Assessment Act 1997.

Negative gearing before and after Budget Night: Comparison

The table below summarizes how different residential property acquisitions are treated under the new legislative framework:

What happens if you purchased an investment property before Budget Night?

If you held a residential investment property before the Budget Night cutoff, or had signed a contract before it, the property is generally protected by grandfathering provisions.

This means eligible rental losses can continue to be deducted against other taxable income, including salary and wages, under the existing arrangements, until the property is sold.

For example, if an investor purchased an established investment property in 2022 and continues to own it after 1 July 2027, the negative gearing changes generally will not restrict their existing ability to offset rental losses against salary income.

However, grandfathering does not mean every expense is deductible. Normal ATO rules regarding the nature, timing and eligibility of rental property deductions continue to apply.

Investors should retain their acquisition records, loan documentation and supporting evidence for rental expenses.

The Treasury's Budget Night announcement confirms the Government's intention to preserve existing negative gearing arrangements for properties held before the cutoff.

What happens if you purchased an established property after Budget Night?

Investors who acquired established residential investment properties after the Budget Night cutoff face a different tax outcome from 1 July 2027. Until 30 June 2027, the existing rules continue to apply.

Under the new rules, where eligible rental expenses exceed residential property income, the excess generally cannot be used to reduce unrelated taxable income such as salary or wages.

However, the excess is not necessarily lost.

The legislation provides mechanisms for restricted amounts to be applied against eligible income and gains from residential property (subject to the legislative calculation rules), and carried forward where they remain unused.

This means investors may still receive tax benefits from eligible rental expenses, but the timing and income against which those expenses can be applied will differ.

The legislative basis for this restriction is section 26-155 of the Income Tax Assessment Act 1997, introduced by Schedule 2 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.

Example: How negative gearing changes affect your tax

Consider an investor with the following financial position:

Note: For illustration only, assume the investor is an Australian resident taxpayer whose income falls in the 30% tax bracket, plus the 2% Medicare levy (a combined marginal rate of 32%), and no other adjustments affecting the calculation. Actual results depend on your tax bracket and circumstances.

Are newly built investment properties exempt from the restrictions?

The reforms preserve negative gearing for eligible newly built residential properties.

The Government's stated objective is to encourage investment in additional housing supply rather than providing the same tax incentives for the purchase of established dwellings.

However, investors should not assume every recently constructed or newly renovated property automatically qualifies.

Eligibility depends on the legal definition of a new residential dwelling and the relevant transitional and exemption provisions. Whether a later buyer of a dwelling qualifies as a new build depends on the detailed requirements for a "new residential dwelling" under section 26-160 of the Income Tax Assessment Act 1997, which can include how long the property has been occupied or held before sale. Confirm the current requirements before relying on a purchase qualifying.

The definition of a new residential dwelling, and the treatment of certain housing developments and of properties transferred through inheritance or relationship breakdown, are set out in the legislation and related instruments. Check the ATO's tax reform page for the current position before relying on them.

Investors considering off-the-plan apartments, newly constructed houses or other developments should confirm eligibility before relying on negative gearing benefits.

Further information is available in Treasury's consultation on negative gearing and capital gains tax legislation.

Can investors still claim rental property deductions?

Yes. The negative gearing reforms do not mean that ordinary rental property expenses are no longer deductible.

Eligible expenses may continue to be claimed, subject to the usual rules and any restrictions applying to net rental losses.

The ATO distinguishes between expenses that may be deductible immediately, expenses deducted over several years and expenses that form part of a property's cost base for capital gains tax purposes.

For example, interest on an eligible investment loan may be deductible, whereas repayment of the loan principal is generally not.

Similarly, replacing an entire asset or making a capital improvement may have a different tax treatment from repairing ordinary wear and tear.

Investors should also ensure that expenses are appropriately apportioned where a property is used privately or is not genuinely available for rent.

Refer to the ATO's Residential Rental Properties guidance for detailed information on rental income, deductible expenses and record-keeping requirements.

What about capital gains tax changes?

The 2026–27 Federal Budget also announced significant reforms to capital gains tax (CGT).

From 1 July 2027, for Australian residents, the 50% CGT discount for individuals, trusts and partnerships is replaced with cost base indexation and a 30% minimum tax on capital gains accruing from that date (worked out after indexation, and applied as a top-up so that the tax on those gains is at least 30%, before tax offsets), subject to transitional arrangements and specific exceptions. These changes apply to CGT assets generally, including shares, not just property.

These changes are separate from the negative gearing restrictions, although both can affect the overall after-tax return on an investment property.

The CGT reforms apply only to gains accruing after 1 July 2027. For assets owned before that date, gains up to 30 June 2027 keep the 50% discount, and the split is worked out using the asset's value at 1 July 2027 (from a valuation or an apportionment formula). Eligible new builds can choose either the old or new method.

Investors should therefore consider both their ongoing rental property deductions and their potential capital gains tax liability when assessing an investment.

The Budget tax explainer provides further information on the CGT reforms, including worked examples.

What should property investors do before 1 July 2027?

Whether you already own an investment property or are considering purchasing one, the changes make accurate tax planning increasingly important:

How Tax Store Rockdale can help

Understanding investment property taxation can be challenging, particularly when legislation changes.

At Tax Store Rockdale, conveniently located in Rockdale, Sydney, we assist individual taxpayers and property investors with:

• Investment property tax returns – maximizing legal deductions, depreciation schedules, and rental schedules.
• Rental income and expense deductions and ATO compliance audits.
• Negative gearing and rental loss calculations and quarantining strategies.
• Capital gains tax calculations – cost base valuations, indexation reviews, and CGT liability forecasting.
• Tax implications of purchasing or selling investment properties before and after July 2027.
• Record keeping, loan interest apportionment, and ongoing tax compliance.

Whether you own an existing investment property or are planning a new purchase, understanding the applicable tax rules can help you make better-informed decisions.

Last reviewed: 17 October 2026

Disclaimer: This article provides general information only and does not constitute personal taxation, financial or investment advice. Tax outcomes depend on individual circumstances and applicable legislation, and the rules may be supplemented by further legislation or ATO guidance. You should seek professional advice before making decisions based on the information provided.