Federal Budget 2026: Negative on Negative Gearing
The 12 May 2026 Federal Budget announced major reforms around investment in housing, in an effort to ‘level the playing field’ for first home buyers and support investment in new housing supply. House prices have risen more than twice as fast as average full-time earnings while ownership rates for 25- to 34-year-olds have been declining in the 20 years since 2001.
Negative gearing – what is changing
Under the current system, losses from a rental property can be used to reduce a taxpayer’s other forms of taxable income, such as salary and wages, often leading to tax advantages which are not available to owner occupier taxpayers.
Under the reform, from 1 July 2027 negative gearing losses will be limited to eligible new builds and any existing investment properties held before the announcement on budget night (7:30pm AEST 12 May 2026). Losses related to established residential properties acquired after budget night will only be deductible against rental income or the capital gains from residential properties. Any excess will be carried forward and able to be offset against residential income, rent or capital gains, in future years.
These changes will apply to individuals, partnerships, companies and most trusts. Superannuation funds (including SMSFs) and widely held trusts (for example most managed investment trusts) will be excluded from these reforms.
What is a new build?
It is clear from the reform that the government is attempting to increase housing supply by limiting negative gearing to newly constructed properties. But what is a ‘newly constructed property’?
Eligible new builds will include:
- A newly constructed apartment bought off-the-plan;
- A duplex constructed through a knock-down rebuild replacing a single, free-standing house;
- Any residential construction on previously vacant land; and
- A newly bult property which is occupied for less than 12 months before being first sold.
Builds or changes to properties that will not be considered new builds include knock-down and rebuild of a single house, granny flat built adjacent to an established property, extensive renovations including adding additional bedrooms and newly built property which is occupied for more than 12 months before being sold to a subsequent investor.
Transitional timelines
The changes to negative gearing announced on budget night, if legislated, are set to take effect from 1 July 2027. So, what happens before then?
Properties held at announcement, including those where a contract has been entered into but not yet settled, will be allowed to be negatively geared in all future years until sold. There are no changes for these properties.
Properties purchased between announcement on budget night and 30 June 2027 may be negatively geared during this period. From 1 July 2027 any losses from these properties will be required to be offset against other rental income or carried forward to future years.
Properties that are considered ‘eligible new builds’ will continue to be eligible for negative gearing both before and after 1 July 2027.
Final thoughts
It is clear that the change announced by the government is skewed towards attempting to increase property supply, in particular new builds. However, the grandfathering rules means there is no effect on existing investors who held properties prior to the announcement and who will continue to indefinitely benefit from the tax break of negative gearing.
Also pushing investors towards new builds will mean an effect on supply, where there is already a shortage of availability and trades. Will this sector keep up? Will there also be an increase in rental prices due to a shortage of properties in established areas as investors seek alternatives due to limited negative gearing?
If legislated, time will only tell.