Negative gearing in Australia continues for property held before the 2026 Budget cut-off and for eligible new builds. Established homes bought after that cut-off face restricted loss deductions from the 2027 to 2028 income year.
Existing holders keep their current negative gearing treatment until sale, including where their purchase contract was entered into before the cut-off but settlement followed later. A rental loss still costs money, even when it reduces tax. Lenders that count the tax saving have less income to recognise when an established purchase loses that benefit.
How Negative Gearing Works
Negative gearing occurs when a rental property's deductible expenses exceed its rental income and the investor has borrowed to fund it. Expenses can include loan interest, maintenance, repairs, property management and depreciation on eligible assets.
Where losses can offset salary or other income, the tax saving depends on the investor's marginal tax rate. The deduction reduces taxable income by the loss amount.
For a hypothetical investor whose entire $10,000 deduction falls within a 30% tax bracket, the income tax saving is $3,000. This simplified example excludes Medicare levy, offsets and other adjustments. The deduction does not return $10,000 to the investor.
A tax loss and a cash shortfall can differ because depreciation is a non-cash deduction and principal repayments are not deductible interest. See how net rental property losses are calculated and assessed by lenders for that separate calculation.
What the 2026 Reform Changes
The 2026 reform preserves negative gearing for ownership interests acquired before the Budget announcement cut-off. That protection includes contracts entered into before the cut-off which had not yet settled. It continues until the property is sold.
For established homes bought after the cut-off, losses can offset residential property income and eligible residential property capital gains from the 2027 to 2028 income year. Unused losses carry forward. They cannot reduce wages or other non-residential income under those rules.
A purchase after the cut-off can still receive the existing treatment during the 2026 to 2027 income year. That temporary treatment ends when the new loss rules apply.
The exact announcement time is in the ATO's negative gearing and capital gains tax reform guidance and Treasury's Budget reform summary. A purchase in 2026 is not automatically protected: its timing against that cut-off decides the result.
Eligible new builds retain access to negative gearing. The Budget tax explainer describes dwellings built on vacant land and replacements that increase the number of dwellings. Replacing one house with one house does not add supply for this exemption.
The explainer also restricts prior sales and occupation, including a 12-month occupation limit in the builder-first-owned exception. A later buyer cannot assume a recently built dwelling qualifies. Section 26-160 makes the legal definition depend on requirements set by legislative instrument.
The Tax Reform No. 2 Act 2026 adds protection for qualifying transfers after a spouse's death, a co-owner's death or a relationship breakdown. Those provisions have specific conditions. The Act also prevents the main-residence-to-rental market-value reset from itself removing the relevant exemption.
Capital gains tax has a separate transition. Treasury's summary applies the new arrangements to gains accruing after the reform's 2027 commencement boundary. Keeping negative gearing protection does not preserve the previous capital gains treatment for every future gain.
A Brief History
Negative gearing has been part of Australian tax law since 1936. The government restricted rental losses against other income from 1985 to 1987, then reinstated the deduction.
The parliamentary inquiry into home ownership records concerns about rents behind that reversal. The episode explains why reform proposals face scrutiny over rental supply and rents. It does not establish that tax settings alone determine rent movements.
Testing Whether the Numbers Work
Test a negatively geared purchase against its full holding costs and the tax treatment that actually applies to that property. Work through four checks before relying on a projected return.
- Model the full costs against realistic rent. Include interest, council rates, insurance, management, maintenance and strata levies where applicable. Keep principal repayments in the cash budget even though they are not deductible.
- Calculate the marginal-rate benefit. Apply the relevant rate to eligible deductions and allow for the investor's actual taxable income. A quarantined loss produces no immediate reduction in salary tax.
- Stress-test cash flow with vacancies, higher interest and unexpected repairs. Work out how much cash the investor must contribute and how long their buffer lasts.
- Test the growth assumption. Compare a supported sale-value scenario with accumulated after-tax holding losses, buying and selling costs and capital gains tax. Run a weaker-growth scenario too.
A pay as you go (PAYG) withholding variation can reduce tax withheld from wages when an eligible rental deduction is expected to produce a refund. It changes when the tax benefit arrives. It does not increase the deduction or make a quarantined loss deductible against wages.
The ATO rental properties guide explains the variation. Have a registered tax agent work out the eligible deduction before applying.
How Lenders Treat Negative Gearing in Serviceability
Lenders can count an eligible negative gearing tax benefit when assessing whether your income covers the loan repayments. Their treatment affects borrowing power even when the investor and property are identical.
A calculator can recalculate income tax after deducting the eligible rental loss. Another approach adds the resulting tax saving to net income. These are two ways of recognising the benefit, so the same saving must never be counted twice.
A lender can also exclude the benefit and assess discounted rental income against buffered loan repayments and property costs. The Australian Prudential Regulation Authority's residential mortgage lending guidance supports that conservative approach. Where a bank recognises the tax benefit, the guidance bases it on actual interest rather than buffered interest.
The repayment assessment therefore uses a higher interest rate while the deductible interest reflects the actual rate. Negative gearing rarely removes the assessment shortfall because the tax saving covers only a fraction of the eligible loss.
Hypothetical Borrowing Power Comparison
Assume one investor earns $100,000 in annual salary and receives $26,000 in annual rent. Their investment loan is $500,000 at 6% interest, with $6,000 in other deductible annual property costs.
For this example, actual annual interest is $30,000. The rental loss is $10,000, and an assumed 30% marginal tax rate produces a $3,000 annual saving. The entire deduction falls within that bracket. Ignore Medicare levy, offsets and depreciation.
All three hypothetical lenders accept 80% of rent and separately deduct the $6,000 property costs. Each assesses principal and interest over 30 years at an illustrative 9% rate. The assumed buffer is an example, not a statement of every lender's policy.
Assessed repayments are about $4,023 a month. Accepted rent after the separate property costs is about $1,233 a month, leaving about $2,790 for the investor's salary to cover.
| Hypothetical Treatment | Annual Tax Benefit Counted | Monthly Assessment Effect |
|---|---|---|
| Lender A recalculates tax with the eligible loss | $3,000 | $250 more net income |
| Lender B adds the tax saving to net income | $3,000 | $250 more net income |
| Lender C excludes the tax benefit | $0 | No extra net income |
At the same 9% assessment rate over 30 years, $250 a month supports roughly $31,000 of additional principal-and-interest debt. That is the isolated borrowing-power difference between the treatments when every other input stays fixed.
The comparison assumes each lender's minimum surplus and other constraints are unchanged. It is not a loan approval or a complete maximum-loan calculation. Use the full loan serviceability assessment for income, living costs and other debts.
How the 2026 Changes Affect Borrowing Power
The 2026 changes reduce borrowing power where a lender previously counted a salary-tax benefit that the investor can no longer claim. For an established dwelling bought after the cut-off, the restricted loss cannot reduce tax on wages from the 2027 to 2028 income year.
In the hypothetical example, removing the salary-tax benefit removes the $250 monthly income adjustment. Under the same assumptions, borrowing capacity falls by roughly $31,000. A lender already excluding that benefit has no equivalent add-back to remove.
Losses can still reduce eligible residential property income or capital gains, or carry forward under the reform. That does not automatically create extra salary income for a lender's calculator.
Grandfathered holdings and eligible new builds retain their tax treatment. A lender that recognises negative gearing can continue to count the eligible benefit under its policy. Retaining the tax entitlement does not require every lender to recognise it.
Keep the executed purchase contract and evidence of dwelling type on the investor file. Record how the contract meets the cut-off or how the property qualifies as an eligible new build.
Before quoting a borrowing figure, the broker must confirm how each lender's current calculator treats post-cut-off purchases. A calculator can remove the benefit before the tax rules commence because it assesses the borrower's ongoing repayment capacity. Recalculate any earlier estimate that relied on the benefit.
Positive Gearing as the Alternative
A positively geared property earns more rental income than its deductible costs and produces taxable profit. Investors prioritising income have less need to fund an ongoing loss from their wages.
A negatively geared property requires the investor to cover a shortfall while relying on sufficient future returns to justify that cost. The investor needs the income and reserves to keep holding it through weaker conditions.
Positive gearing reduces that particular cash-flow pressure, but vacancies, repairs and falling property values still create risk. Compare the after-tax cash budget for each property, including principal repayments, against your income needs and capacity to absorb losses.
Other Tax Items to Flag on an Investor File
An investor file needs a borrowing-purpose record as well as a rental-loss estimate. Interest deductibility follows how borrowed money is used, subject to the applicable deduction rules. The property securing the loan does not establish its purpose.
Taxation Ruling TR 2000/2 treats a redraw as a new borrowing. Redrawing an investment loan for private spending can create a private component whose interest needs apportionment.
Withdrawing your own savings from a separate offset account does not create a new borrowing. It reduces the offset balance and can increase interest on the existing loan. The original borrowing's purpose still determines that interest's treatment.
For example, a private holiday paid from an investment-loan redraw creates a private borrowing component. Paying for the holiday from savings in a separate offset account leaves the underlying loan's purpose unchanged.
Use investment property loan structures to keep borrowing purposes traceable. Debt recycling is a separate strategy which also depends on tracing the investment use of each borrowing.
A quantity surveyor's depreciation schedule separates eligible plant and equipment under Division 40 from building and structural capital works under Division 43. The ATO's TR 2004/16 explains the distinction. The tax agent must establish which scheduled amounts the investor can claim.
Keep the schedule's non-cash deductions separate from actual cash expenses. Never add a hoped-for tax refund to serviceability. Use the lender's assessment rules and have a registered tax agent confirm the investor's tax treatment.
Where to Check the Detail
Use the ATO's guidance and the legislation as the primary sources for a property decision. Schedule 2 of the Tax Reform No. 1 Act 2026 sets the loss rules, with the No. 2 Act's technical amendments.
Give your registered tax agent the purchase contract, ownership details, loan transaction history and depreciation schedule. Ask them to identify the applicable exemption or loss restriction and model the after-tax cash position before you commit to a purchase or loan restructure.
