Two weeks on from the delivery of the 2026 Federal Budget on 12 May a storm has erupted in the media, social media, among the small business community, in the polls and, in the property and investment markets. Much of the attention has been around the changes to Capital Gains Tax and the impact on Small Business where many business owners choose to grow their business early on by not drawing a wage, hoping to be rewarded later on when the business becomes profitable and is possibly sold, for a profit (capital gain).
This storm has even crossed the Tasman with the New Zealand Government issuing a call out to Australian Start-Ups to relocate to New Zealand where tax policies are much more favourable.
Gaining less attention are the changes that have been made to Negative Gearing. But, before we go to far, its important to mention that at this stage, these new tax policies have not been put before parliament for a vote so there remains the possibility that changes will be made before they become law and, given the backlash across the community there is a possibility that changes will be made. Although, maybe we are being a little optimistic here?
What Is negative Gearing?
Glad you asked!
Negative Gearing allows a property investor to off-set losses on a rental property against their normal income such as salaries and wages or profits from a small business taken as personal income. Investment property losses occur when the income from an investment property (such as rental income) is less that the costs to own that property (including council rates, insurance, maintenance and interest on a loan used to finance the purchase of the property).
For example:
A couple purchase an investment property in joint names and rent it out with the total annual rental income received of $28,000 for the year.
They incur property expenses such as strata levies, council rates, property management and insurance costs (etc) totalling $5,000.
To purchase the property they used an investment property loan (in joint names) with an annual interest cost of $43,000.
Their income from the property via rent ($28,000) less property expenses and loan interest (totalling $48,000) derives a loss in the financial year of $20,000.
They earn a combined $345,000 in income for the year. Person 1 being $225,000 and therefore with a top marginal tax rate of 45% and Person 2 earns $120,000 and is hence in a top marginal tax bracket of 30%.
Because they purchased the property jointly, in equal shares, they can off-set their share of the rental loss ($10,000 each) against their income hence for Person 1 their taxable income becomes $215,000 and for Person 2 it’s $110,000.
Having paid tax through the year as PAYG wage earners, when they submit their tax returns, their tax paid for the year is assessed based on the lower net taxable income and hence they receive a combined tax refund of $7,500.
Their loss on the investment property of $20,000 thus becomes a net loss of $12,500.
It’s important to note that according to the ATO, approx half of tax payers with investment properties claim for negative gearing costs hence, this scenario is only relevant to half of all tax payers. The rest generate a net profit and hence pay tax on that income.
It’s also worth noting that we used a higher income tax payer in our example above. According to Treasury, nearly 70% of people who negative gear have a taxable income of less than $80,000 per year. I think its fair to say, its not the rich who are benefitting from negative gearing, its ordinary working Australians many of whom are ‘rentvestors‘ who are using negative gearing to enter the property market instead of First Home Buyer incentives.
If we had used a tax payer on an annual taxable income of $80,000, their refund from a $10,000 investment property loss would have been $3,000 each so a total of $6,000 for our couple in this example.
What’s Changed?
The announcement on 12 May will see negative gearing tax rules changed as follows:
- From 1 July 2027 negative gearing will only be possible for properties that were purchased prior to 12 May 2026 and newly constructed property (houses, townhouses, apartments, etc) (Infographic 1).
- For all other residential investment properties, rental losses can only be off-set against:
- Rental income (profits) from other residential investment properties, or
- Be carried forward to future years and be off-set against rental profits (example in Infographic 2), or
- Capital gains on the later sale of the investment property.
- These changes apply to any entity that holds investment properties, such as individuals, trusts, companies and partnerships. Companies and Trusts were treated this way before these changes so in other words, negative gearing for individuals has now fallen in line with how negative gearing is assessed for Companies and Trusts.
- These changes only apply to residential properties, negative gearing remains unchanged for commercial properties, shares and other investment assets.
Why Have These Changes Been Made?
We will steer clear of political statements here and instead focus on what we see as the drivers for these reforms and the flow on effects.
In their release about the changes to negative gearing and capital gains tax, the Federal Government outlines the following reasons for the change:
- Helping First Home Buyers by lowering incentives for investors to purchase property,
- Retain tax incentives for investors purchasing new properties to stimulate the building of additional homes
- Reduce the burden on tax revenues caused by negative gearing (and Capital Gains Tax) under the previous policy
What we really think is going on:
- Impact on First Home Buyers and Renters (saving to purchase a property): Many FHB and people renting, trying to save for a home, invest in shares, ETFs and even Crypto to help them accelerate their savings and hence, purchase their new home sooner. The changes in CGT will impact these investments and hence, make it even harder for them to save for a new home. For renters there is a double hit as its widely expected that rents will increase by around 10% over the next 12 months, in part as landlords seek to cover the cost of lost negative gearing and in part, as investors exit the market, tightening the supply of rental properties. Treasury modelled a very precise and minute, average rental increase of $2 per week nationally. This is the same Treasury Department who said that the changes to FHB limits on 1 October 2025 would not impact property prices yet in Brisbane, for example, we saw prices for apartments increase by an average of 2% per month in the 6 months post the change. Broadly, economists and the property industry have raised concerns that increases in rents will be closer to 10% with some predicting increases of up to 20% (a little extreme in our view).
- Stimulate the building of more new homes: This is an interesting one as Treasury’s own modelling, published in the budget, predicts that 35,000 fewer new homes will be built. In 2024 the Federal Government set a new housing supply target to build 1.2million new homes over 5 years to June 2029. The National Housing Supply and Affordability Council provided a recent update and after the first 5 quarters of the plan, nationally we were 262,000 homes short of the target, with around 219,000 new homes being completed since June 2024, less than half the target. Given that Treasury has predicted that the supply of new housing post the tax changes will get worse and with migration into Australia still running at extremely high levels, this supply Vs demand imbalance will only get worse, putting more pressure on property prices and rents.
- Increase tax revenues: this is the only one we are in 100% agreement with the Government. Estimates provided by the Government are that they will increase tax revenues by $8.1billion as a result of the changes to CGT and Negative Gearing by 2029/30. That’s a relatively small average of $2billion per year against the national total tax revenue of $839billion. A poultry 0.3% increase in revenues!
Can I Still Negatively Gear?
The short answer is yes and you have a few options:
- You can continue to negatively gear under the existing policy for property you purchased prior to 7.30pm on 12 May 2026
- You can use the existing policy to negatively gear a new residential build purchased after 12 May
- You can use the existing policy to negatively gear a commercial property purchased after 12 May
- You can use the new, carry-forward model explained above if you purchase an established residential property after 12 May
- You can negatively gear a new or existing residential or commercial property purchased after 12 May via a structure in a similar way to how you might have negatively geared an investment property prior to 12 May.
Pardon me, say that again? I can negatively gear new or existing residential or commercial property purchased after 12 May via a structure in a similar way to how I might have negatively geared an investment property prior to 12 May?
Negative Gearing Using A Structure
Not a loophole. Not a workaround. This one is a model for negative gearing that’s been around for decades. Its just not been widely known or used.
Using the same scenario as above, a couple with a combined annual income of $345,000, they own their home and wish to negatively gear an established residential property as an investment, purchased post 12 May 2026 and, they don’t want to use the new carry-forward method.
- Their accountant advises that they can use a Pty Ltd Company structure as the the entity that will purchase the investment property and we will assume that they are joint shareholders and directors in the company that will be set up.
- Their accountant establishes a loan agreement between themselves and their company with a 0% interest rate.
- Their mortgage broker assesses their personal living expenses, existing loan commitments and other expenses and determines that they can borrow the funds they need to purchase the investment property in (loan is their own names, as joint borrowers).
- A company is registered, a loan approved and a property purchased.
- Interest on the investment loan ($43,000) in their individual names can be off-set against their personal income resulting in a total tax refund of $16,125.
- Rental income and property expenses sit within the company, delivering a net profit of $23,000. The company will hence be liable for company tax at a rate of 25-30%.
- The couple can choose to leave the profits in the company or, pay themselves a dividend or wage to move those profits out of the company and into their personal names. Should they do that, this will likely change the size of their personal tax refund as personal income tax will be assessed based on their taxable income including wages/dividends from the company.
Some Things To Consider
- Is a structure appropriate for your personal circumstances?
- What is that Structure?
- What are the set-up and ongoing costs such as company registration, annual ASIC fees, accounting costs, etc?
- Do you need to move net rental income (profits) from the structure to yourself to support your loan and living expenses and how does that impact your tax situation?
- Are their land tax considerations in your State that might result in higher land tax costs when you use a structure Vs buying in an individual/couple’s name?
- If the purpose of the property will change later on, for example if you plan to live in it in future, does this impact you including CGT and other considerations?
- Anything else you need to consider based on your personal situation and plans.
The 6 Year Rule
But wait, there is one more!
If you purchase a property before 12 May that is (or was) your principle place of residence and you have or, you plan to rent it out as a investment property with the intention that it will be your principle place of residence again in future, and in the mean time, you do not have another property in Australia that is your principle place of residence, you can rent it out and negatively gear the property for up to 6 years using the rules that existed prior to 12 May. If you sell the property within that 6 year period, as it’s your principle place of residence, you will not pay Capital Gains Tax.
This is often used by people who might be working or living interstate or overseas for a period of time and intend to return to their home within 6 years. After you move back into your property, the 6 years re-sets so you can move out again and use the 6 year rule more than once.
There is more information on the ATO website about this rule and please do consult your accountant before considering using this rule.
Next Steps
A lot of people have pulled back and pressed pause on the purchase of a new residential investment property because these (proposed) changes to Negative Gearing and Capital Gains Tax. When you add in some international unrest and rises in interest rates, the heat has come out of the property market. We are seeing less competition, a slowing in property price growth and in some cases, even small falls in prices.
In many ways, the current market feels like it was when COVID his at the start of 2020. Uncertainty causing people to pause to see what happens next.
Legendary investor Warren Buffet is famously quoted as saying:
“Be fearful when others are greedy, and greedy when others are fearful.”
During COVID, property prices fell an average of 2.1% nationally while in Brisbane, after small falls in the first few months to April, property prices entered a sustained period of strong growth. In April 2020, the median dwelling value in Brisbane (houses and apartments combined) was $508,386 (Source: Cotality) and in April 2026, the median dwelling value in Brisbane is now $1,116.180.
Buyers who purchased in 2020, 21 and 22, taking a long view on property values, have done exceptionally well.
We see the current market as an opportunity to purchase high quality property during this period, under the right structure, to capitalise on the next growth phase driven by market fundamentals including a shortage of supply, excess demand, increasing construction costs and, with an eye towards the 2032 Olympics.
This article contains general information and simplified examples of current, past and new policy changes. You should seek advice from your accountant, mortgage broker or financial advisor which is specific to your circumstances. The information contained in this article is general and should not be relied upon for any specific decisions you might make relating to the ownership, purchase or sale of property and when managing your tax affairs.