Negative gearing and investment loans: what borrowers should understand

Negative gearing has shaped Australian property investing for decades — and in 2026 the rules changed. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026, enacted on 26 June 2026, rewrote how losses on some residential investment properties are treated, alongside a significant change to capital gains tax. This article explains what negative gearing is, what the new law does in general terms, and — most importantly for our readers — what it may mean for how you think about an investment loan. Two things before we start: the rules are new, the details matter, and this is general information only, not tax advice. Everything here is stated as at July 2026; confirm the current position on the ATO website and with a registered tax agent before acting.

What negative gearing actually is

A property is negatively geared when the costs of holding it — loan interest, rates, insurance, agent fees, maintenance and other deductible expenses — exceed the rental income it produces. The result is a loss. Historically, Australian tax law allowed that loss to be deducted against the investor's other income, including salary, reducing their overall tax bill. The strategy accepted a yearly cash-flow loss in exchange for a tax benefit along the way and, the investor hoped, a capital gain at the end.

Gearing itself is just borrowing to invest. A positively geared property (rent exceeds costs) adds to your income; a negatively geared one costs you money each year. The tax treatment of the loss is what the 2026 reform changed — for some properties.

The 2026 reform: losses quarantined for some established properties

In general terms, and as at July 2026, the new law works like this: from the 2027-28 income year, losses on established residential investment properties purchased after 7:30pm AEST on 12 May 2026 are quarantined. A quarantined loss can generally only be deducted against other residential-property income — including rental income from such properties and capital gains made on them — not against salary or other income.

The loss is not extinguished; it is redirected. But for an investor whose plan relied on offsetting a rental loss against wages each year, the cash-flow picture of a newly purchased established property may now look quite different. Whether and how quarantining applies to a particular purchase is a question for a registered tax agent — the legislation has definitions and edge cases this article does not attempt to cover.

Grandfathering: existing holdings keep the old treatment

Properties already held at the announcement — 7:30pm AEST, 12 May 2026 — are grandfathered: they generally keep the old negative gearing treatment for as long as the owner holds them. Sell, and the grandfathering does not travel with the property to the next buyer. This creates a genuine new consideration for existing investors weighing whether to sell and re-buy, restructure ownership, or hold — decisions that now carry tax consequences that did not exist before, and that need professional advice.

The exemptions: new builds and affordable housing

The quarantining rules are aimed at established dwellings. As at July 2026, negative gearing against all income — salary included — generally continues to be available for:

• New builds — newly constructed dwellings
• Build-to-rent developments
• Social and affordable housing meeting the relevant criteria

The stated policy intent is to steer investment toward adding housing supply. For borrowers, it means the choice between an established property and a new build now has a tax dimension it did not have before — more on that below.

The CGT change alongside it

The same Act changed capital gains tax. From 1 July 2027, the 50 per cent CGT discount for individuals and trusts is replaced by cost-base indexation — adjusting the cost base for inflation, so only real gains are taxed. Gains accruing before that date generally keep the discount treatment, and the additional discount of up to 60 per cent for eligible affordable housing investments remains. How the transition applies to an asset you already own, or one you buy now, is exactly the kind of question a registered tax agent should answer with the legislation in front of them — again, the ATO publishes guidance on the reform.

What this means for your loan decisions

We are a mortgage broking firm, not tax advisers, so we will stay in our lane: what changes about the borrowing decision.

• Cash flow has to carry the investment. This was always good practice; it is now closer to mandatory thinking for post-May-2026 purchases of established property, where a yearly loss may no longer reduce this year's tax on your salary. Model the property's holding cost from rent, expenses and repayments alone — our repayment calculator and borrowing capacity calculator can help — and be honest about whether your income comfortably covers a shortfall with no tax offset softening it.
• Buffers matter more. If quarantined losses accumulate until there is property income or a gain to absorb them, the investor is carrying the full cash shortfall in the meantime. Interest rate rises, vacancies and repairs land entirely on your budget. Lenders already assess you with a buffer of around 3 percentage points; apply the same discipline to your own planning.
• New build vs established now has a tax dimension a broker cannot advise on. The finance side differs too — construction and off-the-plan lending work differently from buying an established home — but the tax comparison between an exempt new build and a quarantined established purchase is squarely accountant territory. Get that advice before you choose the property, not after.
• Loan structure still matters. Interest remains a deductible cost within whatever regime applies to your property, so keeping investment debt cleanly separated from private debt remains important — see our guides on using equity and interest-only investment loans.

None of this makes property investment better or worse in itself. It changes where the return has to come from: more weight on rent covering costs and on the quality of the asset, less on the tax system subsidising a yearly loss.

Talk it through with a broker

We can help you understand what a lender will approve, what the repayments look like under realistic and stressed rates, and how to structure the borrowing cleanly — and we will tell you plainly when a question belongs with your accountant instead. Get in touch to talk through the finance side of your next purchase, or read our investment property loans guide first.

This article is general information only, current as at July 2026, and is not financial or tax advice. The 2026 reforms are new and guidance is still developing — confirm how the rules apply to you with the ATO and a registered tax agent before making decisions.