The 2026–27 Federal Budget introduced a significant change to the taxation of residential investment properties that all property investors need to know.

From 1 July 2027, negative gearing will generally be restricted to new residential properties.

However, the changes do not mean that all existing negatively geared properties will lose their deductions. Importantly, properties acquired before the Government announced the changes on Budget night are generally protected under transitional rules.

The changes have now been enacted through the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Cth), which inserted new sections 26-155 and 26-160 into the Income Tax Assessment Act 1997 (Cth).

What is negative gearing?

1. A residential property is negatively geared where the deductible expenses associated with the property exceed the rental income it produces.
2. Those expenses can include:
   • interest on investment loans;
   • council rates;
   • strata levies;
   • insurance;
   • repairs and maintenance;
   • property management fees; and
   • depreciation and capital works deductions, where available.
3. Under the existing rules, the resulting rental loss can ordinarily be deducted against other assessable income, including salary and wages.
4. For example, if an investor earns $150,000 in salary and makes a $20,000 deductible loss on an investment property, the rental loss can generally reduce the investor’s taxable income to $130,000.
5. It is this ability to offset residential property losses against unrelated income which will be restricted from 1 July 2027 for certain properties.

Which properties are protected?

6. The most important date is not 1 July 2027. It is 30 pm AEST on 12 May 2026, the time of the Budget announcement.
7. The legislation generally protects an ownership interest in a residential dwelling acquired before that time.
8. Section 26-155(2)(a) excludes from the new quarantining rules an ownership interest acquired before 30 pm on 12 May 2026. For properties acquired under contract, the legislation treats the ownership interest as arising when the contract is entered into.
9. Accordingly, an investor who acquired an established residential property before the Budget announcement can generally continue to negatively gear that property after 1 July 2027.

Example

10. Sarah purchased an established apartment in Sydney in 2024.
11. In the 2028 income year, she receives $35,000 in rent but incurs $50,000 in deductible expenses.
12. Because Sarah acquired the property before 7.30 pm on 12 May 2026, the new restrictions generally do not apply to that property.
13. Subject to the ordinary deduction rules, Sarah can continue to claim the $15,000 rental loss against her other assessable income.

What happens if you buy an established property after Budget night?

14. Different rules apply to an established residential investment property acquired after 30 pm on 12 May 2026.
15. From 1 July 2027, losses associated with those properties will generally no longer be deductible against unrelated income such as salary and wages.
16. Instead, section 26-155 quarantines the excess residential property deductions.
17. Broadly, where deductible expenditure relating to relevant residential properties exceeds residential property income:

• the excess is not immediately deductible against other income;
• it may be applied against relevant residential capital gains under the statutory calculation; and
• any remaining amount can generally be carried forward for use in a later income year.

18. The deduction has therefore not necessarily disappeared. Its use has been restricted.

Example: purchasing an established property after 12 May 2026

19. Assume David purchases an established investment property in August 2026.
20. In the 2027–28 income year he earns:

• salary of $180,000;
• rent of $40,000; and
• incurs $60,000 of otherwise deductible rental property expenses.

21. The property produces a $20,000 rental loss.
22. Under the new rules, David will generally not be able to use that $20,000 loss to reduce his $180,000 salary income.
23. Instead, the loss is quarantined and may be available against relevant residential property income or gains, with any remaining amount carried forward in accordance with the legislation.
24. The legislation itself gives a similar example. An investor acquiring an established dwelling in July 2028 with $50,000 of rental income and $65,000 of deductions is permitted to deduct only $50,000, with the remaining $15,000 carried forward.

New properties can still be negatively geared

25. The Government has deliberately preserved negative gearing for qualifying new residential dwellings.
26. Section 26-155(2)(b) excludes a new residential dwelling from the quarantining rule.
27. The policy objective is to redirect the tax incentive associated with negative gearing towards investment that increases housing supply, rather than encouraging additional investor demand for existing housing.
28. Treasury has confirmed that investors in qualifying new builds will continue to be able to deduct rental losses against other income after 1 July 2027.
29. The precise meaning of a new residential dwelling is therefore important.
30. Section 26-160 provides that a dwelling will be a new residential dwelling where it satisfies requirements determined under the legislation. The Government has also indicated that further implementation rules will deal with the definition of new builds and particular categories of housing investment.

What if you own several investment properties?

31. The legislation does not necessarily examine each rental property in complete isolation.
32. In calculating the quarantined amount, relevant residential property income and deductions are brought together under section 26-155.
33. Importantly, subsection 26-155(6) also allows relevant positive income from properties which remain outside the quarantining rules to reduce an otherwise quarantined excess in certain circumstances.
34. This means investors holding a portfolio containing both grandfathered and post-Budget established properties may need to undertake a more detailed calculation than simply determining whether each individual property made a profit or loss.

The changes apply to more than individual investors

35. The negative gearing changes are not confined to individuals.
36. Treasury’s Budget material states that the reforms generally extend to:

• individuals;
• partnerships;
• companies; and
• most trusts.

37. However, the legislation contains exceptions for widely held unit trusts and complying superannuation entities, including complying SMSFs.
38. Investors using trusts or more complex ownership structures should therefore consider the application of the new provisions to their particular structure rather than assuming that the treatment applying to an individually owned property will necessarily be identical.

What happens to carried-forward rental losses?

39. One of the most important features of the reforms is that a restricted rental loss is generally quarantined rather than permanently denied.
40. If the loss cannot be used in the current year, the unused amount may generally be carried forward and potentially applied in a later income year.
41. For example, an investor may initially have substantial interest expenses and make rental losses, but later become positively geared as:

• rents increase;
• debt is repaid;
• interest rates fall; or
• deductible expenses reduce.

42. At that point, previously quarantined amounts may become available in accordance with section 26-155.

Do the changes affect commercial property?

43. The new restriction is directed at residential dwellings used as residential accommodation.
44. It is not a general prohibition on deducting losses from all investment assets.
45. Section 26-160 defines a residential dwelling for these purposes and expressly excludes certain accommodation, including hotels, motels, inns, hostels, boarding houses, certain student accommodation, caravans and boats.
46. The tax treatment of commercial property, short-term accommodation and specialised accommodation should therefore be considered separately.

Do the changes affect properties you already own?

47. For most existing investors, this is the critical point:

A property acquired before 7.30 pm on 12 May 2026 is generally grandfathered.

48. The fact that the investor continues to own that property after 1 July 2027 does not, by itself, cause the property to lose access to the existing negative gearing treatment.
49. The Government described the reforms as prospective and expressly preserved existing arrangements for investments made before the Budget announcement.

What if ownership changes?

50. Greater care will be required where a property is transferred after Budget night.
51. A transfer between spouses, a transfer to or from a trust, a change in ownership interests, an inheritance or a transfer resulting from relationship breakdown can potentially raise questions about whether the relevant taxpayer has acquired a new ownership interest for the purposes of the transitional provisions.
52. The Government released further draft legislation in August 2026 dealing with some of these situations, including preserving existing treatment in certain cases involving inheritance and relationship breakdown.
53. Investors contemplating a restructure or transfer should therefore obtain advice before the transaction occurs. Income tax consequences may also arise alongside CGT, duty and asset-protection considerations.

Negative gearing is only part of the Budget changes

54. Property investors also need to consider the accompanying changes to capital gains tax.
55. The 2026–27 Budget reforms alter the CGT treatment of gains accruing from 1 July 2027, including the introduction of inflation-based cost base indexation and a 30% minimum tax mechanism for certain capital gains.
56. Different treatment can apply to qualifying new residential dwellings.
57. Accordingly, an investment property decision made today should not be analysed solely by reference to annual rental deductions.
58. Investors should consider both:

• the taxation of rental income and expenses while the property is held; and
• the taxation of any eventual capital gain when the property is sold.

What should property investors do before 1 July 2027?

59. Investors should identify which category each property falls into:

Property acquired before 7.30 pm on 12 May 2026

Generally retains existing negative gearing treatment.

Qualifying new residential property

Can generally continue to be negatively geared after 1 July 2027.

Established residential property acquired after 7.30 pm on 12 May 2026

From 1 July 2027, rental losses will generally be quarantined rather than deductible against unrelated income such as salary and wages.

60. Investors should also retain clear records establishing:

• the date the acquisition contract was entered into;
• the nature and age of the dwelling;
• acquisition and construction documentation;
• financing costs;
• rental income and deductible expenditure;
• ownership changes; and
• any carried-forward quarantined losses.

The bottom line

61. Negative gearing has not been abolished.
62. Instead, from 1 July 2027, the Government has restricted the ability to use losses from certain residential investment properties against unrelated income.
63. Existing investments acquired before 30 pm on 12 May 2026 are generally protected.
64. Qualifying new residential properties retain access to negative gearing.
65. Investors purchasing established residential property after Budget night will generally still be entitled to deductions for legitimate investment expenses, but where those expenses exceed relevant residential property income, the excess will generally be quarantined rather than available to reduce salary, wages or other unrelated income.
66. The distinction between an existing property, a grandfathered investment and a qualifying new residential dwelling will therefore become increasingly important when acquiring, transferring or restructuring residential property investments.

Need advice about how the new negative gearing rules affect you?

Waterhouse Tax Lawyers advises taxpayers on complex Australian income tax, property tax and investment structuring issues. If you are acquiring, transferring or restructuring an investment property and are concerned about the new negative gearing or CGT rules, obtaining advice before the transaction occurs can avoid unexpected tax consequences.

This article provides general information only and should not be relied upon as legal or taxation advice. The application of the new rules will depend upon the taxpayer’s circumstances, the property involved, the acquisition date and the ownership structure.