Budget 2026-27: negative gearing limited to new builds from 1 July 2027

The Treasurer's 2026-27 budget, handed down on Tuesday 12 May 2026, has restricted negative gearing on residential property to new builds, effective from 1 July 2027. The change has been the most-searched single line item from budget night for two reasons: first, because negative gearing has been politically untouchable for forty years and the government has now moved on it; second, because the grandfather clause means the actual policy is narrower than the headlines suggest. This guide walks through what the measure does, who is affected, and what investors and prospective investors should do this week.

What the measure actually does

From the 2027-28 income year, only newly built residential properties keep the existing negative gearing rules, where losses on a rental property (interest, depreciation, repairs) can be claimed against other income such as wages. For established residential property bought after 7:30pm AEST on 12 May 2026, a net rental loss can no longer reduce wages or business income. It becomes a quarantined amount. You can use it against rental income from any residential property you own, including grandfathered and new-build ones, and against residential capital gains, including the gain when you sell. Anything left over carries forward to the next year.

Dwellings used for social or affordable housing purposes that the Minister sets by legislative instrument are exempt. The quarantining rule applies whether you hold the property in your own name, through a trust or through a company. Complying super funds, including self-managed super funds, and widely held unit trusts are exempt.

The grandfather clause: existing investors are not affected

The single most important detail in the announcement is the grandfather clause. Any property held at 7:30pm AEST on 12 May 2026 (the moment the Treasurer began the budget speech) retains full access to the existing negative gearing rules for as long as the same owner continues to hold the property. If you owned a rental property at that time, your tax treatment does not change. The negative gearing claim you ran in 2025-26 will continue to be available in 2026-27, 2027-28, and beyond.

The same grandfather treatment applies on a property-by-property basis, not investor-by-investor. An investor with three pre-budget properties can continue to negatively gear all three indefinitely. But if that same investor buys a fourth, established property after 7:30pm on 12 May 2026, the fourth property will be subject to the new rules from 1 July 2027.

The Treasury Laws Amendment (Tax Reform No. 2) Act 2026, which received assent on 26 August, widened this from the 2027-28 income year. Grandfathered or new-build status now passes to a surviving spouse, to a co-owner who inherits a deceased co-owner's share (where both bought before the cut-off), and to a spouse who takes the property under a family law order or agreement after a relationship breakdown.

What changes for new investors from 1 July 2027

An investor buying an established residential property after 7:30pm on 12 May 2026 is taxed differently from the 2027-28 income year. Losses in 2026-27 can still be claimed against wages. From 2027-28 the investor still records income, expenses and losses on the property, but a net rental loss is not deductible against wage or other non-rental income. Instead it is quarantined and pooled. It can be used against rental income from any residential property the investor owns, including grandfathered and new-build ones, and against residential capital gains. Whatever is left carries forward.

On a typical established property purchase of $900,000 at an 80 per cent LVR (loan $720,000) at a 6.5 per cent interest rate, annual interest is roughly $46,800. Depreciation and other deductions add perhaps a further $6,000 to $10,000. Rental income at a 3.5 per cent gross yield is about $31,500. Net rental loss before tax: $21,000 to $25,000. Under the old rules, a 39-cent marginal rate investor would have received a tax refund of about $8,200 to $9,800 a year against that loss; under the new rules, that refund is gone. The loss carries forward and only becomes useful when the investor has residential rental profit to absorb it (from this property once rents outgrow costs, typically year five to seven on a new purchase, or from another rental that is positively geared) or a residential capital gain, such as the gain on sale. An investor who already owns a positively geared rental can absorb the loss straight away, so the change bites hardest on someone buying their first investment property.

For investors buying a brand-new property (off-the-plan, house-and-land, or developer-built apartment), the old negative gearing rules continue indefinitely. The policy is explicitly designed to redirect investor capital from competing with first home buyers on the established market to funding new supply.

What this means for the established-market price

The independent modelling cited in the budget papers projects roughly 75,000 additional first home buyers entering the market over the next decade as a result of the negative gearing and capital gains tax changes combined. The mechanism is straightforward: fewer investors competing for established properties at the entry-level price point. The price effect is expected to be small in aggregate but meaningful in the segments where investor demand has historically been concentrated (apartments in inner-Sydney, inner-Melbourne, and inner-Brisbane; outer-suburban houses in the $700,000 to $1.2 million bracket).

Property industry groups argue that withdrawing investor demand will reduce rental supply and lift rents. The counter-modelling argues that property purchase and rental supply are not the same: a property sold by an investor to an owner-occupier reduces the supply of rentals by one and the demand for rentals by one. Empirical work in the literature on the 1985 to 1987 quarantining experiment is contested. Reasonable analysts disagree on the magnitude; few claim either zero effect or a catastrophic effect.

What investors should do this week

1. If you held property at 7:30pm AEST 12 May 2026: do nothing in response to this measure. Your negative gearing position is grandfathered. (CGT on growth from 1 July 2027 does change; see item 4.) Continue your normal cycle: review rates, review serviceability, review depreciation schedules.
2. If you were planning to buy an established investment property in 2026-27 or 2027-28: re-run the after-tax cashflow assuming no negative gearing benefit. For most loss-making properties on current rates, the after-tax cashflow drag widens by 25 to 40 per cent. Some deals will no longer make sense; others still will.
3. If you were planning to buy a new-build investment property: nothing changes for you. The full old rules continue. Indeed, you are the explicit policy target the government wants to encourage.
4. If you were planning to sell an investment property: read our separate piece on the CGT changes (also effective 1 July 2027). There is no need to rush a sale before 30 June 2027. Gains that build up before 1 July 2027 keep the 50 per cent CGT discount whenever you sell; only growth from 1 July 2027 is taxed under cost base indexation and the 30 per cent minimum tax. (Updated 28 September 2026: this item originally said selling after 30 June 2027 would lose the discount on the whole gain.)
5. Speak to your accountant about whether quarantined-loss treatment changes your investment thesis. For some investors, the case for switching to commercial property (where negative gearing rules are unchanged) is now stronger. For others, the right answer is to stay in residential and accept the change.

Where the legislation landed

The measure is now law. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 passed Parliament on 25 June 2026 and received assent the next day. The Tax Reform No. 2 Act added the inheritance and separation rules on 26 August. The Act does not define a "new residential dwelling". The Minister sets that by legislative instrument, so check a specific property against the instrument before relying on new-build treatment.

We wrote this piece to the policy as announced on budget night. On 28 September 2026 we checked it against the Act, the ATO's summary and the Parliamentary Library's Bills Digest, and corrected it where the law differs.