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 1 July 2027, only newly built residential properties will be eligible for the existing negative gearing rules, where losses on a rental property (interest, depreciation, repairs) can be claimed against other income such as wages. Investments in established residential property purchased after 7:30pm AEST 12 May 2026 will no longer be able to use rental losses to reduce other taxable income; losses on those properties will be quarantined and can only be offset against future rental profits or capital gains on the same property.
Government social housing programs and registered affordable housing schemes are exempt from the changes. The new rules apply to natural persons, trusts, and partnerships; investments held in self-managed super funds operate under separate super rules that are not affected by this measure.
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.
What changes for new investors from 1 July 2027
A new investor buying an established residential property after 7:30pm 12 May 2026 will be taxed differently from 1 July 2027. The investor will still record income, expenses, and losses on the property, but any net rental loss will not be deductible against wage or other non-rental income. Instead, the loss is quarantined: it accumulates in the property and is available to offset future rental profits on the same property, or, eventually, the capital gain on sale.
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, the loss carries forward in the property and is only useful when rents grow above costs (typically year five to seven on a new purchase) or when the property is sold.
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.
The honest read: a 0.5 to 1.5 per cent additional rent rise over five years in the directly-affected segments, and a 1 to 3 per cent additional drag on prices in the same segments, are both plausible. Neither is dramatic.
What investors should do this week
- If you held property at 7:30pm AEST 12 May 2026: do nothing in response to this measure. Your tax position is grandfathered. Continue your normal cycle: review rates, review serviceability, review depreciation schedules.
- 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.
- 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.
- If you were planning to sell an investment property: read our separate piece on the CGT changes (also effective 1 July 2027). The interaction matters: selling before 30 June 2027 preserves the 50 per cent CGT discount; selling after that date uses the new cost-base-indexation plus 30 per cent minimum tax rate.
- 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.
What happens between now and 1 July 2027
The 14 months between budget night and the start date is the legislative window. The bill needs to pass both houses. The government has a working majority in the House of Representatives; the Senate will require negotiation with the cross-bench. The measure as announced may be amended during passage, particularly on the definition of "new build" (off-the-plan apartments? substantial renovations?) and on transitional rules for pre-budget contracts.
Our position is to write to the announced policy as it stands today, with appropriate caveats where the legislation has not yet been drafted. We will update this article each time the bill takes a material step (introduction, committee stage, passage) and link to a comparison of the as-announced versus as-passed measure when it lands.