Negative gearing and the 1 July 2027 rule change

What negative gearing is, and what the reform did to it

Negative gearing describes a tax outcome rather than a product: interest and deductible holding costs on an investment property exceed the rent, and the net rental loss reduces your other assessable income. That is the version most Australian investors grew up with, and for new acquisitions of established residential property it ends on 1 July 2027.

This is law, not a proposal. The changes announced at 7:30pm AEST on Tuesday 12 May 2026 received Royal Assent on 26 June 2026 and take effect from 1 July 2027. From that date, deducting net rental losses against salary, wages or business income is limited to newly constructed dwellings. On established residential property the loss is quarantined: carried forward against future residential property income or against a future capital gain, but no longer set against your wages.

Three positions, and the moment that separates them

If you held an investment property at 7:30pm on 12 May 2026, or were under an exchanged contract at that moment, you are grandfathered. Current negative gearing treatment and the current 50 per cent capital gains tax discount continue for that asset for as long as you hold it. The cut-off was set at the moment of the speech precisely so it could not be gamed, and holding a pre-approval was never enough.

If you acquire between that moment and 30 June 2027 you get current treatment for the period up to 30 June 2027, and the new rules then apply to the property from 1 July 2027. That is a transition rather than permanent grandfathering, and the difference is worth understanding before signing anything on the strength of the window.

If you acquire from 1 July 2027, the new rules apply from the start: quarantined losses on established stock, indexation in place of the 50 per cent discount, and both concessions preserved on newly constructed dwellings.

What quarantining does to your cashflow

Take an established rental producing a net loss of $8,000 in a year under the new rules, where you also hold another residential property returning $3,000 of positive income. The loss is applied against that income first, using $3,000 of it. The remaining $5,000 is carried forward. None of it reduces your salary tax that year.

For a taxpayer on a 39 per cent marginal rate including the Medicare levy, the old treatment would have returned roughly $3,100 of that loss through the tax system in the same year. Under quarantining the cash cost of holding the property is unchanged and the benefit becomes deferred and conditional — usable later against residential property income, or against a capital gain when you eventually sell.

Two consequences follow, and both matter more to a lender than to an accountant. Your weekly holding cost does not fall. And a refund you were mentally banking to cover the shortfall may not arrive at all, which is exactly the assumption that turns a tight investment into a distressed one.

Grandfathering attaches to the asset, not to you

This is the line most likely to be misread. Sell a grandfathered property in 2029 and buy another, and the replacement is acquired under the rules applying then. The protection does not travel with the investor and there is no mechanism to carry it across, so a portfolio decision to recycle capital now carries a tax cost it did not carry before May 2026.

Refinancing, by contrast, does not break grandfathering. Changing your rate, switching lenders or restructuring the loan against the same grandfathered property leaves the tax position alone — a refinance moves your cashflow, not your treatment. If you have been sitting on an uncompetitive investment loan out of caution about the reforms, that caution is costing you money for no protection.

The capital gains half of the reform

For new acquisitions from 1 July 2027, other than newly constructed dwellings, the 50 per cent CGT discount is replaced by cost-base indexation — the rule that applied before 21 September 1999. Indexation lifts your cost base in line with the Consumer Price Index, so tax is levied on the real gain rather than on half the nominal one.

The two systems are differently shaped rather than simply better or worse. On a $700,000 purchase later sold for $1,100,000 the discount taxes $200,000 of a $400,000 nominal gain. With average CPI of 3 per cent across a ten-year hold, indexation lifts the cost base to roughly $940,000 and taxes the full $160,000 difference at your marginal rate. In low-inflation, high-real-growth conditions the discount wins; in the reverse conditions indexation can produce the smaller bill.

A 30 per cent minimum effective tax rate on capital gains also applies from 1 July 2027 for very high earners, extended to discretionary trust distributions from 1 July 2028. For most investors on ordinary marginal rates it changes nothing, because the marginal rate already exceeds 30 per cent.

What lenders do with an investment file

None of the tax detail changes how a loan is assessed, and the mechanics are unsentimental. Rent is shaded, commonly to 70 or 80 per cent. The debt behind the property counts in full. Whether a negative gearing benefit can be added back to income at all is lender policy and differs materially between banks — some allow it, some ignore it entirely, and on the same file the gap can be worth six figures of capacity.

Interest-only lowers the near-term repayment and delays equity building, which is a larger exposure now than it was. National dwelling values fell 0.9 per cent in August 2026 on the Cotality index, a fifth consecutive monthly decline that left the median 3.6 per cent below the March peak. An interest-only investor in a falling market is relying entirely on rent and time.

Where the tax question belongs

Deductibility, entity structure, the transition-window arithmetic and whether a valuation is worth commissioning are questions for a registered tax agent working on your own numbers. What a broker contributes is the loan side: which lender reads your rental income and gearing position most usefully, whether the structure keeps deductible and non-deductible debt properly separated, and how the file looks once a 3 percentage point buffer is applied.

This page is general information for Australian readers as at September 2026 and is not tax, financial or credit advice. The worked examples illustrate the mechanics rather than projecting your outcome — confirm your own position with a registered tax agent and against the ATO’s published material before relying on any figure here.