What was announced?
The Budget announced a significant shift in tax policy on negative gearing – the practice of deducting net rental investment losses against other income commonly used by property investors to reduce their taxable income. From 1 July 2027, negative gearing will be restricted to new investments. Losses from newly acquired investment assets (especially residential properties) will no longer be allowed as deductions against wage or other income, unless the asset is an eligible new build.
In practical terms, if you buy a rental property after the effective date (and it isn’t considered an eligible new build), any rental shortfall (where interest and other costs exceed rental income) cannot be used to immediately reduce your other taxable income. Instead, such losses will be “quarantined” – they can be carried forward to offset future rental profits from that property or reduce the capital gain when it is eventually sold. This approach retains the economic value of rental losses but removes the year-to-year tax benefit that current negative gearing provides.
Subject to legislation being passed, these changes are likely to take effect from 1 July 2027. To manage an immediate shock to the market, some relief is also proposed in that grandfathering is expected to apply. That is, existing negatively geared investments (purchased before 7:30 PM on 12 May 2026) would continue to operate under the current rules, with taxpayers continuing to claim their rental losses against other income going forward.
Although the primary target is clearly housing investors, the exact scope of this proposal is still unclear. While we wait for legislation to pass, Moore Australia is here to explain what we know so far and to provide some practical tips for dealing with the uncertainty this proposed change brings.
Who is not impacted by these changes?
As mentioned above, eligible new builds will be exempt from these changes. Eligible new builds are expected to include
- dwellings constructed on vacant land, or
- where existing properties are demolished and replaced with a greater number of dwellings.
However, knock-down rebuilds or substantial renovations that do not increase the housing supply are not eligible new builds. Furthermore, a new build cannot have been previously sold, unless first owned by the builder and not occupied for more than 12 months.
Properties in widely held trusts and superannuation funds will be excluded from these changes. The Government have also announced targeted exemptions for build to rent developments and private investors supporting government housing programs.
Who could it affect the most?
Property investors with high borrowing and low rental yields are commonly those for whom negative gearing has been a blessing. If these proposed changes are implemented from 1 July 2027, new investors in existing residential property must be prepared to cover any rental shortfalls without immediate tax relief.
Investors who are planning on purchasing an investment property which is not considered an eligible new build after Budget night, will be impacted by these changes will impact them.
Less affected are those who invest in newly built eligible rental properties as they will remain eligible to claim losses as they go, preserving an incentive to invest in new housing. Further, existing negatively geared investments would be unaffected if grandfathering is confirmed as well as those current investors who hold investment properties that are cash-flow positive. First-home buyers and owner-occupiers are not directly affected, though they might see indirect benefits if reduced investor demand cools property prices over time.
Practical implications for affected taxpayers
We know this change to negative gearing will only apply to residential property. Currently, industry experts acknowledged the policy’s objective of improving housing affordability but caution about transitional impacts on the rental market. By limiting negative gearing to new housing, the government aims to steer investment toward building new homes (boosting supply) while gradually reducing investor demand for existing housing. However, some commentators note this could lead to short-term reduction in rental property investment, potentially putting upward pressure on the rental market if not carefully managed.
The ATO will likely provide detailed rules on how loss quarantining works in practice – ensuring that losses can be tracked and offset correctly in later years. Taxpayers are advised to consider cash flow impacts of needing to fund any annual rental losses out of pocket until such time they are cash flow positive or, a profitable future sale occurs, in order to utilise those losses.
Worked Example
Let’s hypothesise, Maria, a high-income earning professional, buys an existing investment apartment in August 2027 for $600,000, financed largely by a loan. In FY28, she earns $20,000 in rent but has $30,000 of interest and other deductible costs, incurring a net rental loss of $10,000 for the year.
Current position
Maria could deduct the $10,000 loss against her salary income. If she’s in the 37% tax bracket, this saves her $3,700 in tax that year (she pays $3,700 less tax due to the loss deduction).
Proposed position
Maria cannot deduct the $10,000 loss against other income that year and instead she pays $3,700 more in tax in FY28. The $10,000 loss is carried-forward for use in a future year when the property becomes cash-flow positive or she sells it at a profit reducing the capital gains tax imposed on disposal.
The proposed rules remove the immediate tax benefit of negative gearing, affect the cash flow of investors and delay the utilisation losses for, potentially, many years into the future.
What’s next?
The phasing in of this measure offers a window for preparation.
- Model your cash flow projections – When making any decisions to purchase established residential investment dwellings, identify to what extent you could sustain any losses without tax offsets. This may highlight how deliberate you need to be in maintaining negative gearing on a future investment property.
- Review your investment strategy and plan ‘when’ to buy –
- if relying on negative gearing benefits, purchasing an established residential investment property before 1 July 2027 would only give you access to gearing benefits until 30 June 2027; or
- if you plan to buy on investing in an eligible new build, it should be exempt from the changes pending what the final legislation says. Decisions around purchasing an investment property will come down to a multitude of factors with tax just being one of them – speaking to your advisor is critical.
- Keep across the detail – since legislation isn’t passed yet, it’s crucial not to make any rushed decisions. The proposals could be amended or not passed at all. For now, the prudent step is to flag this coming change and ensure awareness of what the outcomes could be.
The removal of negative gearing is a big blow for serial property investors. The aim may have been to help the struggling housing and rental markets but these changes, if enacted, will not be without some hefty financial consequences for investors. We recommend taxpayers affected by these proposals take this opportunity to plan any future investments with care. Moore Australia will continue to monitor these developments and provide guidance to help taxpayers navigate the new tax rules with confidence and clarity.
