From 1 July 2027, the Government will limit the ability to negatively gear residential investment properties purchased from 7.30pm on 12 May 2026 other than new builds. Arrangements in relation to existing residential properties will be grandfathered.
Negative gearing occurs where the income earned from property is less than the expenses incurred (for example, interest, maintenance and depreciation) in owning it during an income year. Under the new rules, rental losses from residential properties purchased from 7.30pm on 12 May 2026 will only be able to be applied against other income where the property is a new build. Taxpayers caught by these changes will only be able to deduct losses relating to established residential investment properties against other income from residential properties (whether new builds or not), including capital gains. Any excess losses will be quarantined and able to be carried forward and offset against residential property income in future years.
It remains unclear whether income from residential property investment will retain its character for these purposes if received indirectly, such as through a partnership or trust (including a managed fund). For example, if the measure is limited only to direct property investments, negative gearing losses may have to be carried forward by a taxpayer despite receiving a distribution from another entity that invested in residential property.
Exemptions
The changes will apply to residential properties purchased by individuals, partnerships, companies and most trusts. However, widely held trusts (for example, Managed Investment Trusts (MITs)) and superannuation funds (including SMSFs) will be excluded from the measures.
Critically, residential properties held at the time of announcement (including where a contract has been entered into but not yet settled) will be grandfathered and remain eligible for negative gearing until sale. However, it remains unclear whether residential properties held at announcement but not previously used for investment (for example a main residence) will be grandfathered if they start to be used to generate income after the announcement date.
Further exemptions are proposed to apply to certain build to rent developments and private investors participating in government housing programs. However, limited details regarding the scope of these exemptions have been released.
New builds
For purchases of “new builds”, access to negative gearing will still be available, with an option to apply either the 50% CGT discount or the concurrently announced indexation and minimum 30% tax upon sale.
The budget papers include the below table summarising examples of dwellings which qualify as a new build:
| Eligible new build | Not an eligible new build |
| A newly constructed apartment bought off-the-plan | An established property that has recently been extended to add additional bedrooms |
| A duplex constructed through a knock-down rebuild replacing a single, free-standing house | A free-standing house constructed through a knock-down rebuild replacing an older, smaller free-standing house |
| Any residential construction on previously vacant land | A granny flat built adjacent to an established property that is not eligible for negative gearing |
| A newly built property which is occupied for less than 12 months before being first sold | A newly built property which is occupied for more than 12 months before being sold to a subsequent investor |
Transitional rules
Established properties purchased after the announcement may be negatively geared until 30 June 2027, but deductions may be denied for these properties from 1 July 2027.
Key takeaways
It appears that any losses incurred from an established residential property will be able to be offset against net rental income derived from other properties, including capital gains. As a result, a taxpayer’s residential property income will be assessed on an aggregate basis for each income year, rather than losses being quarantined to a specific property.
Broadly, the measure creates a timing issue, as any remaining carried forward loss can be applied to reduce the taxable gain on sale of the property. However, if the gain on sale is less than the carried forward loss, or a loss is made on sale, then the denial of deductions may be permanent.
