What the May 2026 Budget actually did, who is grandfathered, and the part most investors are panicking about for the wrong reason.
If you own an investment property or you are about to buy one, you have probably read a headline that made your stomach drop. Negative gearing, the deduction a generation of Australian investors built their plans around, is being reined in.
Here is the calm version, with the dates that matter, the people who are protected, and the point most coverage gets wrong: this does not just dent your tax position, it can cut your borrowing capacity by 20% or more, which is exactly why which property you buy now matters more than it ever has.
We are mortgage brokers, not accountants, so the tax modelling here is general information and your accountant owns the final numbers. What we can tell you is how lenders treat negative gearing in their serviceability calculations, because that is the part most coverage misses and it is where the real bite lands.
The short version
From 1 July 2027, negative gearing on residential property will be limited to new builds. Losses on established properties bought after 7:30pm AEST on 12 May 2026 can no longer be offset against your salary. Anything you already owned at that moment is grandfathered and keeps the current rules. (Source: Australian Taxation Office.)
That is the whole change in three sentences. The detail is where the decisions live.
Important: this measure is not yet law. It was announced in the Budget and the Government intends it to apply from 1 July 2027, but it still has to pass Parliament. Plan around the announced direction, but do not treat it as settled legislation yet.
What the May 2026 Budget actually changed
The Government framed this as redirecting tax support toward new housing supply. (Source: Budget 2026-27.) Three moving parts matter.
Negative gearing is being narrowed to new builds
From 1 July 2027, only new builds will let you deduct rental losses against other income such as your salary. A new build means a home not previously sold as a residence: off-the-plan purchases, homes on vacant land, and house-and-land packages. Where an existing home is demolished, the replacement only qualifies if it delivers more dwellings than before, so the policy rewards a net increase in supply. (Source: ATO; Baker McKenzie.)
Losses on new established purchases get quarantined
Buy an established residential property after 7:30pm AEST on 12 May 2026 and, from 1 July 2027, its rental losses are quarantined. You can only offset them against residential rental income or capital gains from residential property, and you carry forward any excess to use against that same income in future years. You cannot use the loss to reduce tax on your salary. (Source: ATO.)
The loss is not lost. It is parked and carried forward. That distinction matters more than the panic suggests, and we come back to it.
The capital gains tax discount is changing too
For individuals and trusts, the 50% CGT discount is being replaced with cost base indexation plus a 30% minimum tax rate on gains that accrue after 1 July 2027. Gains up to that date are calculated under the current rules, and gains after it under the new ones. (Source: Baker McKenzie.) Negative gearing and CGT were always two halves of the same strategy, so model them together with your accountant, not in isolation.
Who is grandfathered, and how solid is it
If you held a residential investment property at 7:30pm AEST on 12 May 2026, you keep the current negative gearing rules on that property for as long as you own it. The grandfathering travels with the property in your hands, not with you as an investor. (Source: ATO.)
Two practical points that catch people out:
Contracts exchanged before the cut-off generally count. If you signed before 7:30pm on 12 May 2026 but settled afterwards, the property is still expected to be treated as held at announcement. Property settles weeks or months after exchange, so this protects a lot of deals that were already in train.
Grandfathering does not survive a sale. Sell a grandfathered property and the protection goes with it. The next buyer is under the new rules, and if you buy again you are under the new rules too. That single fact reshapes the hold-versus-sell decision, which we get to below.
This is general information, not personal tax advice. Your accountant needs to confirm your specific property qualifies and how the carry-forward interacts with your return.
What no one else is saying
Removing negative gearing can cut your borrowing capacity by 20% or more. That is why property selection now matters more than it ever has.
Most coverage frames this as a tax-refund story. The sharper bite is what it does to the bank’s serviceability calculation: when the tax benefit comes out, so does the capacity it was supporting. Based on the assessments we run for clients, this is general information, not personal advice.
Here is the part that sits in our column. Many lender serviceability calculators add back the negative gearing tax benefit as income when they work out what you can afford. Take that benefit away and the add-back goes with it, the property’s after-tax holding cost climbs, and the amount the bank will lend you falls. In the assessments we run, removing the negative gearing benefit can cut borrowing capacity by 20% or more on the same salary. The tax change is the headline. The serviceability change is the one that quietly resets how much property you can actually acquire, and it is the reason the next two decisions matter so much.
Beyond that capacity hit, behaviour changes too:
The lock-in effect. Because grandfathering dies on sale, every investor holding a negatively geared established property at 12 May 2026 now has a stronger reason to hold rather than sell and recycle. Expect less established stock to turn over, which has its own flow-on effects for the investors trying to buy it.
The new-build tilt. From 1 July 2027 the deduction follows new supply. For investors who rely on negative gearing in the early years, that nudges the smart purchase toward off-the-plan, house-and-land, and new dwellings, each of which carries its own risks: valuation gaps at settlement, build quality, and finance that has to be structured to survive a long settlement.
The cash-flow re-think. If you buy an established property after the cut-off, you should plan as though the loss only ever offsets future residential property income. That makes genuine serviceability, not the tax refund, the thing that has to stack up.
For how the borrowing maths actually works once you factor in APRA’s settings, see our pieces on what APRA’s DTI rules mean for high-income investors and the borrowing capacity audit.
A worked illustration
This is an illustrative example, not a real client, and the figures are rounded for clarity. Always have your accountant model your own position.
Picture an investor on a high salary who buys an established unit after the cut-off for $800,000. In the early years the property runs at a $15,000 annual loss after interest and costs. Under the old rules that $15,000 reduces their taxable salary, worth roughly $7,000 back at a top marginal rate. Under the new rules that $15,000 is quarantined: it offsets other residential property income or carries forward, but it does not touch their salary this year.
Two things now move against them. Their annual cash flow worsens, because the $7,000 that used to come back at tax time no longer offsets their salary, so they fund more of the holding cost from real income. And their borrowing capacity falls, because the lender’s servicing calculator loses the negative-gearing add-back it previously credited. On figures like these we routinely see assessed capacity drop by 20% or more, which can be the difference between qualifying for the next purchase and being told no. The decision shifts from “the tax man helps me hold this” to “is this the right property to hold at all,” which is where selection comes in.
Why property selection now matters more than ever
When the tax system was quietly subsidising the holding cost of almost any negatively geared property, you could afford to be a little loose about which one you bought. That cushion is going, and your borrowing capacity is tighter, so the property itself has to do the work. Three things decide whether it can.
The cash-flow profile. Different properties run completely differently in the early years. A higher-yield property can sit close to neutral from day one, while a low-yield, high-growth property can bleed cash for years. With the tax cushion gone, you need to know which one you are buying and whether your income can carry it.
The size and length of the early-year loss. It is not enough to know a property is negatively geared. Model how big the annual shortfall is and how many years it runs before rent growth closes the gap. A $5,000-a-year shortfall for two years is a very different commitment to a $20,000-a-year shortfall for six, and once the tax benefit is quarantined only one of them may fit your cash flow.
The structure you hold it in. Who owns the property changes what happens to those early losses. Held personally, a quarantined loss waits to offset future residential property income. Other structures treat losses differently again, and a company, for example, carries losses forward against its future profits. The right structure is your accountant’s call, but it interacts directly with the cash-flow plan and the lending, so it belongs in the same conversation with your accountant and your broker. General information only, not personal tax advice.
None of this is new advice. What is new is that the tax system is no longer hiding a poor property choice. Selection, cash flow and structure now carry the weight the deduction used to.
What to actually do now
Do not panic-sell a grandfathered property. The protection is valuable precisely because it cannot be repurchased. Selling to “get ahead of the change” usually destroys the one advantage you hold.
Get your structure and your finance reviewed together. The negative gearing change interacts with how you hold the property and how the loan is structured. That is a conversation for you, your accountant and your broker in the same room. It is what our Property Wealth Strategy and Finance Plan is built to coordinate.
Stress-test new purchases on cash flow, not the refund. If you are buying after the cut-off, model the holding cost as though the tax benefit is deferred, because for established property it now is.
Watch the legislation. None of this is law yet. The direction is set, but the detail can shift as it passes Parliament, so keep your accountant in the loop through the transition.
The new-build trap: do not chase the deduction into a bad asset
The policy is designed to push investor money toward new dwellings, and the deduction is the carrot. That is exactly where investors get hurt if they buy the tax break instead of the asset. A few things to keep your eyes open for before you chase a new build for its negative gearing.
The valuation gap at settlement. Off-the-plan and house-and-land deals settle a long way after you sign. If the market softens or the bank values the finished property below your contract price, you have to cover the shortfall in cash, because the lender funds a percentage of the lower figure. That gap has sunk more new-build investors than any tax change ever will.
The new-build premium. New stock often sells at a premium to comparable established property, and some of that premium evaporates the day it stops being new. A deduction is worth little if you overpaid for the asset producing it.
Finance that has to survive the wait. A long settlement means your borrowing capacity, your rates and your serviceability all have to still stack up at completion, not just on the day you sign. Lending conditions and your own circumstances can move in between. The loan needs to be structured for that, which is squarely our job.
Concentration and quality. Large off-the-plan developments can flood a single pocket with similar stock, capping rental growth and resale. Build quality varies. The deduction does not protect you from either.
None of this means new builds are a bad idea. It means the deduction should be the last reason you buy one, not the first. Run the asset on its own merits, then let the tax treatment be a bonus. General information only, and your accountant confirms the tax side for your situation.
FAQ
Is negative gearing being abolished in Australia?
No, not entirely. From 1 July 2027 it is being limited to new builds for properties bought after 7:30pm AEST on 12 May 2026. Established properties bought after that time have their losses quarantined against residential property income rather than salary. Properties held before the cut-off are grandfathered under current rules. The measure is not yet law.
Will my existing investment property be affected?
If you held it at 7:30pm AEST on 12 May 2026, no. It is grandfathered and keeps the current negative gearing rules for as long as you own it. Selling it ends the protection.
What counts as a new build?
A home not previously sold as a residence, including off-the-plan purchases, homes on vacant land, and house-and-land packages. A demolish-and-replace only qualifies if it increases the number of dwellings.
Does this change how much I can borrow?
Yes, and often by more than people expect. Many lender serviceability models add back the negative gearing tax benefit as income, so removing it can cut borrowing capacity by 20% or more on the same salary, on top of a higher after-tax holding cost. That is why which property you buy, and how you hold it, now matters more than ever.
If I exchanged contracts before 12 May 2026 but settle later, am I protected?
Contracts entered into before the cut-off are generally expected to be treated as held at announcement, even if settlement happens afterwards. Confirm your specific contract with your accountant.
Does negative gearing still make sense at all after this?
For new builds, the deduction against other income continues. For established property bought after the cut-off, the strategy shifts from a tax play to a genuine cash-flow and growth decision. Whether it suits you depends on your income, your other property holdings and your time horizon, which your accountant should model.
The bottom line
The negative gearing change is real, it is not yet law, and it lands harder on your borrowing capacity than the tax-refund headlines suggest. If you already own, your grandfathering is an asset worth protecting. If you are buying, the decision moves from chasing a tax refund to choosing the right property, with a cash-flow profile and a structure that stack up once the deduction is gone.
That is the conversation we have every week. If you want the lending side of your next move mapped properly, book a complimentary 30-minute strategy call: buildprotectfs.com.au/contact. You can also start with our free guides at buildprotectfs.com.au/guides.
Sources
- Australian Taxation Office, Tax reform: reforming negative gearing and capital gains tax: https://www.ato.gov.au/about-ato/new-legislation/in-detail/individuals/tax-reform-boosting-home-ownership-reforming-negative-gearing-and-capital-gains-tax
- Australian Government, Budget 2026-27, Tax reform: https://budget.gov.au/content/04-tax-reform.htm
- Australian Government, Budget 2026-27, Negative gearing and CGT factsheet (PDF): https://budget.gov.au/content/factsheets/download/tax-explainers-negative-gearing-capital-gains-tax.pdf
- Baker McKenzie, Australia Budget Bites: CGT discount and negative gearing: https://www.bakermckenzie.com/en/insight/publications/2026/05/australia-budget-bites-cgt-discount-and-negative-gearing
- William Buck, Federal Budget 2026 analysis, negative gearing: https://williambuck.com/tools/federal-budget-2026/negative-gearing/
- Commonwealth Bank, Get up to speed on negative gearing: https://www.commbank.com.au/articles/newsroom/2026/05/explainer-get-up-to-speed-on-negative-gearing.html
- Reserve Bank of Australia, Monetary policy decision June 2026 (cash rate 4.35%): https://www.rba.gov.au/media-releases/2026/mr-26-12.html
Build & Protect Financial Services. Credit Representative 539491 of Australian Finance Group Ltd (ACN 066 385 822), Australian Credit Licence 389087. This article is general information only and does not constitute personal financial, credit or tax advice. Negative gearing and tax outcomes depend on your circumstances and should be modelled with your accountant. Consider your own situation and seek advice from a licensed professional before acting.