Understanding the New Negative Gearing Rules: What Property Investors Need to Know

The Federal Government has proposed various changes to the taxation of residential investment properties as part of the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 and one of the major reforms is the limitation of deductions for residential property investments to certain new builds from the 2027-28 income year.

What is Negative Gearing?

‘Negative gearing’ generally refers to a particular structure of property investment where the costs of owning an investment property, particularly interest payments on the loan, exceed the rental income it generates.

By way of an example, for an investor with:

Rental income from property: $30,000

Interest and other expenses from owning the property: $40,000

Net loss from property investment: $10,000

Business income: $30,000

Under the current rules, that $10,000 loss could generally be deducted against the investor’s $30,000 business income.

What’s changing?

From the 2027-28 income year, losses from many residential investment properties can no longer be used to reduce other taxable income. Instead, those losses may be “quarantined” and carried forward.

In practical terms, this means the $10,000 net loss from property investment can no longer be deducted from the business income of $30,000 under the above example. Instead, the loss is carried forward to future years. The carried-forward amount can generally be accumulated and used against future rental profits or certain capital gains from residential property.

Grandfathering and exclusions

The new rules do not apply to:

1. Existing Properties Owned Before 12 May 2026

Properties acquired before 7.30 pm (ACT time) on 12 May 2026 are grandfathered – this means owners of these properties can generally continue to access the existing negative gearing rules.

2. Eligible New Residential Dwellings

New residential dwellings remain eligible for negative gearing.

The Minister will be empowered to determine what qualifies as a “new residential dwelling”, with the objective of increasing Australia’s housing supply. This is expected to include newly constructed homes and potentially certain substantial redevelopment projects.

3. Excluded entities

The new negative gearing rules exclude:

1. 1. A widely held units trust as defined in section 272-105 in Schedule 2F to the Income Tax Assessment Act 1936, or
   2. A complying superannuation entity.

What does this mean for investors?

Investors with residential properties acquired before 12 May 2026 may be largely unaffected due to the grandfathering provisions.

For properties acquired post 12 May 2026, it will become more important than ever to maintain annual schedules of unused tax losses from residential property investments with supporting documentation to ensure the availability of same to offset against future rental income and capital gains that may arise from the investment properties.

Taxpayers with residential property holdings in trusts or companies should also consider how quarantined property tax losses will interplay with general tax loss rules associated with each structure carefully so that such tax losses are not inadvertently lost via changes to the structures such as changes to shareholding or controlling positions.

For beneficiaries of a trust estate, if the trust earns income from residential rental property and distributes that income to a beneficiary, the beneficiary is treated as having received residential property income for the purposes of the negative gearing rules. This may allow beneficiaries to utilise quarantined losses by increasing their pool of qualifying residential property income from such distributions. It may also be helpful for the trustees making a distribution of such income to relay this information to the recipient beneficiary to allow for appropriate deductions to be made in the beneficiary’s hands.

Contact us

For further information please contact Corporate & Commercial Senior Associate, Peter Azam on 03 5273 5273 or email info@coulterlegal.com.au.