Negative Gearing Changes: What Property Investors Need to Know
Many property owners have heard that negative gearing is ending, but the new rules do not apply to every residential investment property in the same way.
From 1 July 2027, eligible new builds and properties protected by the transitional arrangements can retain the existing treatment. Net rental losses from affected established properties will instead be quarantined and cannot reduce salary, wages or other unrelated income.
The acquisition cutoff is separate from the commencement date. Properties held, or covered by a qualifying purchase contract, before 7:30 pm AEST on 12 May 2026 are generally grandfathered. Established properties acquired after that cutoff remain under the existing arrangements until 30 June 2027.
These changes do not automatically remove ordinary rental property deductions. Property owners must still identify assessable rent, classify eligible expenses and calculate the net rental result. The property category then determines how any loss can be used.
This guide explains the changes from an accounting and tax-reporting perspective, including rental deductions, quarantined losses, record keeping and the information your accountant may need.
What Is Negative Gearing?
Negative gearing occurs when the deductible costs of earning income from a rental property exceed its assessable rental income, creating a net rental loss. Depending on the property’s type and acquisition date, that loss may reduce other taxable income or be quarantined for use against residential property income.
The calculation starts with the rent and other assessable income earned from the property. Eligible deductions are then applied, which may include interest on funds borrowed for the rental property, property management fees, rates, insurance and certain repairs. Other costs, such as capital works and the decline in value of eligible assets, may be claimed over time rather than deducted immediately.
The resulting tax loss is not always the same as the property’s cash shortfall. Loan principal repayments are not rental deductions, while some non-cash deductions may reduce the taxable result without creating a current cash payment. This means a property can have a different outcome in its bank account and its tax return.
Positive gearing occurs when assessable rental income is greater than deductible expenses. A rental loss produces the opposite tax result, but the way it can be used now depends on the property classification.
What Are the New Negative Gearing Rules?
The reforms are enacted and create different tax outcomes based on when an established property was acquired and whether a property qualifies as a new build. The acquisition cutoff determines which properties are affected, while the commencement date determines when the loss restrictions begin.
The Australian Treasury’s negative gearing guidance confirms that the changes commence on 1 July 2027. Properties held before 7:30 pm AEST on 12 May 2026 are generally exempt. The transitional arrangements can also cover an established property acquired under a qualifying purchase contract entered into before that cutoff, even if settlement occurred later.
Eligible new builds can continue to use a net rental loss against salary, wages and other taxable income after 1 July 2027, provided the property satisfies the legislative requirements.
An established residential property acquired after the cutoff remains under the existing arrangements until 30 June 2027. From 1 July 2027, its net rental loss is quarantined. It cannot reduce salary, wages or unrelated income, but may be used against residential property income and relevant residential property capital gains. An eligible unused balance can generally be carried forward.
| Property Position | Treatment Through 30 June 2027 | Treatment From 1 July 2027 |
| Established property held or under a qualifying contract before 7:30 pm AEST on 12 May 2026 | Existing treatment applies | Grandfathered treatment generally continues while the qualifying owner holds the property |
| Eligible new build | Existing treatment applies | A net rental loss may continue to reduce other taxable income, subject to eligibility |
| Established property acquired after the cutoff | Existing treatment applies | A net rental loss is quarantined to residential property income and relevant residential property capital gains |
This table provides a simplified overview. Ownership structure, contract terms and the property’s eligibility can affect the final tax treatment, so the relevant evidence should be reviewed before a return is lodged.
Which Negative Gearing Treatment Applies to Your Property?
The tax treatment of a rental loss depends on when the property was acquired and whether it meets the requirements for an eligible new build. This is an accounting classification question, not a comparison of investment options. Contracts, ownership records and construction details may need to be reviewed before the correct treatment can be confirmed.
Properties Held or Under Contract Before 12 May 2026
An established residential property is generally protected by the grandfathering provisions if it was held before 7:30 pm AEST on 12 May 2026. The protection can also apply where a binding purchase contract was entered into before the cutoff, even if settlement and the transfer of legal ownership occurred later.
Grandfathered treatment generally continues while the qualifying owner holds the property. An eligible net rental loss may continue to reduce salary, wages or other taxable income after 1 July 2027, subject to the ordinary rental deduction rules.
The protection does not generally attach permanently to the property. A later purchaser will usually need to apply the rules relevant to their own acquisition.
Property owners should retain the signed contract, evidence of when it was entered into, the settlement statement and ownership records. These documents may be needed to support the property’s classification in a later tax return.
Eligible New Builds
An eligible new build may retain broader loss treatment after 1 July 2027. A property is not automatically eligible merely because it is recently constructed, has never been rented or has undergone substantial renovations.
The Australian Government’s negative gearing and capital gains tax explainer indicates that an eligible new build must generally add to housing supply. This may include a dwelling constructed on vacant land or a redevelopment that replaces existing properties with a greater number of homes.
A knock-down rebuild that does not increase housing supply may not qualify. The same may apply to a substantially renovated established dwelling or a property that has already been sold, subject to the detailed legislative conditions.
Owners relying on the new-build treatment should retain documents supporting the development history, construction, completion and first sale. Eligibility should be confirmed against the legal requirements rather than assumed from a sales description.
Established Properties Acquired After the Cutoff
An established investment property acquired after 7:30 pm AEST on 12 May 2026 remains under the existing arrangements until 30 June 2027.
From 1 July 2027, a net rental loss from an affected property cannot generally reduce salary, wages or unrelated income. It is quarantined within the residential property income framework and may be carried forward if it cannot be fully used in that income year.
Eligible rental expenses do not stop being deductible. They are still classified and used to calculate the net rental result. The new rules determine how the resulting loss can be applied.
How Is Negative Gearing Calculated?
Calculating the rental result starts with the property’s assessable income and allowable deductions. The final tax result is then reviewed under the rules that apply to the acquisition date and classification.
First, record the gross rent and any other assessable amounts received from the property. This may include retained bond money, insurance payments for lost rent or tenant reimbursements in some circumstances.
Next, identify the expenses that can be claimed in the current income year. These may include eligible interest, property management fees, rates, insurance and qualifying repairs. Deductions for capital works, borrowing expenses and the decline in value of eligible assets may also be included, but they are generally claimed over time.
Expenses must be apportioned where the property was used privately, rented below market value or available for rent for only part of the year. Once the allowable amounts are confirmed, they are subtracted from assessable rental income to calculate the net rental profit or loss.
The following simplified example shows the basic calculation:
| Item | Illustrative Annual Amount |
| Gross rental income | $30,000 |
| Eligible interest expense | ($24,000) |
| Rates, insurance and property management fees | ($7,000) |
| Eligible repairs and current-year deductions | ($2,000) |
| Capital works and decline in value deductions for the year | ($1,000) |
| Net rental result | ($4,000) |
The property produces a $4,000 net rental loss for tax purposes. That does not necessarily mean its cash shortfall is also $4,000.
Loan principal repayments are not rental deductions, so they may reduce cash without affecting the rental tax result. Conversely, capital works and decline in value deductions may reduce taxable income without requiring an equivalent payment during that year.
Whether the $4,000 loss can reduce salary or other taxable income depends on the property treatment. A grandfathered property or eligible new build may retain broader treatment, while a loss from an affected established property will generally be quarantined from 1 July 2027.
What Rental Property Tax Deductions May Be Available?
Rental property tax deductions depend on the nature of the expense, when it was incurred and how the property was used. Some costs may be deductible in the current income year, while others must be claimed over time or included in the property’s capital gains tax records.
The property must generally be rented or genuinely available for rent when the expense is incurred. Deductions may also need to be apportioned where the property is used privately, rented below market value or available to tenants for only part of the year.
Expenses That May Be Deductible in the Current Year
Expenses connected directly with earning rental income may be deductible in the year they are incurred. Depending on the circumstances, these may include:
- Interest on funds borrowed to purchase or maintain the rental property
- Property management fees and commissions
- Council and water rates
- Land tax
- Building, contents and public liability insurance
- Advertising for tenants
- Pest control
- Eligible repairs and maintenance
- Certain accounting costs relating to the property’s tax affairs
Interest is one of the most commonly misunderstood rental property expenses. Deductibility generally follows how the borrowed money was used, not simply which property was offered as security.
For example, interest may need to be apportioned if part of an investment loan was redrawn for private spending. Refinancing or combining private and rental borrowings can also make the deductible portion more difficult to identify.
Expenses Claimed Over Several Years
Some investment property tax deductions are not available in full in the year the cost is paid. They may instead be claimed gradually under specific tax rules.
These expenses may include:
- Borrowing expenses, such as eligible loan establishment fees and lender’s mortgage insurance
- Capital works deductions for qualifying construction and structural improvements
- Decline in value deductions for eligible depreciating assets
The amount and timing of the deduction can depend on the type of expenditure, when the property or asset was acquired and whether restrictions apply to second-hand residential property assets. Records should identify the expense clearly rather than grouping it with immediately deductible costs.
Costs That Are Not Immediately Deductible
Some property-related payments do not reduce rental income in the year they are paid.
Repayment of loan principal is not a rental deduction. Purchase and disposal costs, including conveyancing fees and stamp duty on the property acquisition, are also generally treated as capital costs rather than immediate deductions.
Improvements, renovations and complete replacements are usually treated differently from repairs. A repair generally restores something that has deteriorated or been damaged, while an improvement changes its character or provides a significant upgrade.
Initial repairs may also require different treatment where the defect existed when the property was acquired. Depending on the expense, the cost may instead be recognised through capital works deductions, decline in value or the property’s CGT cost base.
The ATO’s rental expense guidance explains the different treatment of current deductions, deductions claimed over time and capital costs.
Private Use and Genuine Rental Availability
Rental deductions may need to be reduced if the property is used privately or is not available to tenants for the full income year.
Apportionment may be required where:
- The owner or their family uses the property
- The property is rented to relatives or friends below market value
- Only part of the property is rented
- It is available for rent for only part of the year
- Restrictions or unrealistic conditions mean it is not genuinely available for rent
Correctly classifying these costs is necessary before calculating the net rental profit or loss. The reform then determines where an affected loss may be used.
Does Quarantining Change What You Can Claim?
Quarantining changes where an affected net rental loss can be used. It does not automatically make otherwise allowable rental expenses non-deductible.
The accounting process still begins by identifying assessable rental income and classifying eligible deductions, including amounts claimed immediately or spread over several years. These figures produce the net rental profit or loss.
The loss rules apply after that calculation.
For example, assume an affected established property has $30,000 of rental income and $38,000 of allowable deductions. The property has an $8,000 net rental loss.
From 1 July 2027, that $8,000 loss cannot generally reduce the owner’s salary, wages or unrelated income. It is quarantined for use within the residential property income framework.
This does not mean the eligible $5,000 interest expense has stopped being deductible. It must still satisfy the ordinary rules, including that the borrowed funds were used to earn rental income. The reform changes how the final $8,000 loss is applied, not whether each expense is automatically allowed or denied.
Property owners must therefore answer three separate accounting questions:
- What rental income is assessable?
- Which expenses are deductible, and when can they be claimed?
- Where can the resulting net loss be used?
Keeping these steps separate prevents quarantining from being mistaken for a general ban on rental property deductions.
What Happens to Quarantined Rental Losses?
A quarantined rental loss is not necessarily lost. It is generally carried forward and used within the residential property income framework when eligible income is available.
From 1 July 2027, a net loss from an affected established residential property cannot generally reduce salary, wages or unrelated income. Subject to the final ordering and ownership rules, it may first be applied against income from other residential properties held by the taxpayer.
Any balance that cannot be used in the current income year can generally be carried forward. Records should reconcile the opening balance, amounts used and the amount remaining for future years.
The following simplified example shows how this may work:
| Item | Illustrative Amount |
| Salary and wages | $100,000 |
| Net loss from an affected established property | ($10,000) |
| Net income from another residential property | $3,000 |
| Loss applied against residential property income | $3,000 |
| Remaining loss carried forward | $7,000 |
In this example, $3,000 of the loss is used against other residential property income. The remaining $7,000 is carried forward rather than deducted from salary.
Carried-forward losses may also be available against a relevant residential property capital gain. The precise treatment depends on the enacted ordering rules, ownership structure and nature of the gain.
This article does not cover the broader calculation of capital gains tax on investment property, including the cost base, ownership period and any available discount. Those issues require a separate calculation when the property is sold.
Property owners should maintain an annual loss schedule rather than relying only on figures carried forward in tax software. It should record the loss created, amounts applied and the unused balance.
The ATO may introduce specific return labels, worksheets or reporting instructions for the 2027–28 income year. These requirements should be checked before the first affected return is prepared.
Records Property Owners Should Keep
Good record keeping is essential for calculating rental income and deductions, supporting the property classification and tracking carried-forward losses.
The 2026 reforms make acquisition evidence especially important. A signed contract and settlement records may help establish grandfathering, while owners relying on new-build treatment may need evidence of development history, construction and first sale.
The following records should generally be retained:
| Record Group | Why It Matters |
| Signed purchase contract and evidence of when it was entered into | Supports the acquisition date and potential grandfathered treatment |
| Settlement statement and ownership records | Confirms acquisition details, ownership interests and relevant capital costs |
| Builder, development and first-sale documents | Helps support an eligible new-build classification |
| Property manager annual statements | Reconciles rent received, fees paid and expenses deducted from rental income |
| Loan statements and evidence showing how borrowed funds were used | Supports eligible interest deductions and any required apportionment |
| Council rates, water charges, insurance and land tax records | Substantiates recurring rental property expenses |
| Repair and maintenance invoices | Helps distinguish deductible repairs from improvements or replacements |
| Renovation and capital works invoices | Supports capital works, decline in value or CGT treatment |
| Capital works or quantity surveyor schedules | Records deductions claimed over several income years |
| Private-use and rental-availability dates | Supports apportionment where the property was not fully available for rent |
| Previous tax returns and rental schedules | Helps reconcile prior claims and opening balances |
| Carried-forward rental loss schedules | Tracks losses created, used and carried into later income years |
Loan records should show more than the amount owing. Where a loan has been refinanced, redrawn or used for both private and rental purposes, records should establish how each amount was used.
Property owners should also avoid relying solely on a property manager’s annual statement. That statement may not include loan interest, capital works, depreciation, private-use adjustments or expenses paid directly by the owner.
Some records may need to be kept beyond the year in which the cost was incurred, particularly where they support a deduction claimed over time, a carried-forward loss, grandfathered status or a future capital gains tax calculation.
Before lodging, the records should reconcile to the rental schedule and any opening loss balances. Missing or inconsistent documents can affect both the current deduction and the tax treatment applied in later years.
Common Negative Gearing and Rental Deduction Errors
Rental property errors often arise from incorrect classification, incomplete records or confusion about expense and loss treatment. They can affect the current return and losses carried into later years.
- Claiming the full mortgage repayment
Only the eligible interest component may be deductible. Repayment of loan principal does not reduce assessable rental income, even though it affects the property owner’s cash flow.
- Claiming all interest after a private redraw
Interest deductibility generally follows how the borrowed money was used. If part of a rental property loan is redrawn for private expenses, the interest may need to be apportioned. Refinancing a mixed-purpose loan does not automatically restore full deductibility.
- Treating improvements as repairs
A repair generally restores something that has deteriorated or been damaged. An improvement, substantial renovation or complete replacement is usually treated as capital expenditure and may need to be claimed over time or included in the CGT cost base.
- Claiming expenses for private or below-market use
Rental property expenses may need to be apportioned where the owner uses the property privately or allows relatives or friends to occupy it below market rates. The same issue can arise where only part of the property is available to tenants.
- Claiming expenses when the property is not genuinely available for rent
Advertising a property does not necessarily establish genuine rental availability. Excessive rent, unreasonable conditions or restricted advertising may indicate that the property was not genuinely offered to the market.
- Assuming every recently built property is an eligible new build
A newly completed or extensively renovated property does not automatically qualify for the post-1 July 2027 new-build treatment. Eligibility depends on the legislative conditions and supporting evidence.
- Using an affected loss against salary after 1 July 2027
A net loss from an affected established property generally cannot reduce salary, wages or unrelated income from 1 July 2027. It must be dealt with under the residential property loss-quarantining rules.
- Losing evidence needed to establish grandfathering
A signed purchase contract, contract date and settlement records may be needed to prove that an established property qualifies for transitional treatment. Missing documents can make the tax classification more difficult to support.
- Failing to reconcile carried-forward losses
Quarantined losses should be tracked from year to year. The opening balance, amounts used and remaining balance should agree with the tax return and supporting rental schedules.
- Claiming expenses twice
A property manager’s annual statement may already include fees, repairs, rates or other costs. These amounts should be reconciled with invoices and bank records to avoid duplicating deductions paid or reported elsewhere.
Reviewing these issues before lodging can help ensure the rental schedule reflects the property’s actual income, allowable deductions and correct loss treatment.
Frequently Asked Questions
The following questions address the most common points property owners may need to confirm after reviewing the reforms.
When Should You Review Your Rental Property Tax Position?
The ordinary rental deduction rules determine the net rental profit or loss. The reform then determines where an affected loss can be used.
A review may be appropriate where:
- The purchase contract was entered into close to 7:30 pm AEST on 12 May 2026
- Settlement occurred after the acquisition cutoff
- The property is being treated as an eligible new build
- A loan has been refinanced, redrawn or used partly for private purposes
- The property has been used privately or rented below market value
- Major repairs, renovations or replacements have been completed
- The property is expected to produce a loss after 1 July 2027
- Carried-forward rental losses need to be established or reconciled
- A future sale may create a residential property capital gain
These situations can affect the classification of rental expenses, calculation of the net result and records needed to support the tax return.
Grow Advisory Group can provide investment property accounting services to help review rental income and expenses, confirm the available documentation, calculate the property’s tax result and track carried-forward losses. If you are uncertain how the acquisition date, property classification or rental deduction rules apply, speak with a registered tax agent before lodging. The right accounting treatment depends on the facts, ownership structure and available evidence.