Refocusing tax incentives toward new housing supply

The 2026–27 Federal Budget announced reforms that included significant changes to negative gearing, aimed at encouraging investment in new housing supply.  Those changes are now law.

From 1 July 2027, the new rules limit negative gearing to newly constructed residential properties. Residential properties purchased prior to budget night (12 May 2026) have been grandfathered.

Grandfathering rules

The grandfathering provisions mean:

• Properties acquired before 7:30pm (AEST), 12 May 2026 are not affected (any negative gearing losses can be claimed and offset against other taxable income.
• Transitional treatment applies for acquisitions between budget night and 30 June 2027
• The full application of the new rules begins from 1 July 2027 (2027/28 financial year onwards).

This creates a clear distinction between existing holdings and future investments.

What’s changing?

Under the new rules, for residential properties bought after budget night:

• Any rental losses can still be claimed for the 2026 and 2027 financial years.
• From 1 July 2027, rental losses on “new residential property” can continue to be claimed as negative gearing losses and offset against any other taxable income.
• From 1 July 2027, rental losses from “established” residential properties purchased after Budget night can only be offset against
  • other current year residential rental property income; or
  • current year capital gains on the sale of residential rental property; or
  • carried forward to future years to be offset against future year residential property income or residential property capital gains.
• The amount of any quarantined loss is offset against gross residential property capital gains before the CGT discount is applied and before the small business concessions are applied. 

What qualifies as a “new build”?

The definition of new residential property only includes properties that genuinely add to the housing stock.   This means that a new property will only qualify where:

1. It is a newly constructed property on land that had no residential dwelling.
2. It is a newly constructed property on land that increases the number of separately acquirable properties on that land. This means that a one for one knock down rebuild will not qualify.  It also means that a knock down rebuild dual occ will not qualify unless each new residence is separately titled.  
3. It is a conversion of a non-residential building into housing.
4. The property is purchased within 24 months of its first Certificate of Occupancy Certificate being issued.

One good clarification that has now been included in the new law is regarding investment properties owned jointly with your spouse. The announced changes were going to cause issues where one of you passes away and the survivor inherits the other half because the change in ownership of 50% of the property would have been treated as a new acquisition and therefore might have lost its grandfathered status as eligible for negative gearing.  The law has now been amended and that transfer will now not be treated as a new acquisition. The property will retain its original purchase date and, with it, the negative gearing treatment it already had. The same applies where a marriage ends and a property is transferred per the Family Law Act.

What about negative gearing losses on other assets?

The rules for claiming negative gearing losses on other assets, for example commercial/non-residential properties and share/ETF portfolios have not changed and are still claimable against any other taxable income.

Our perspective

This new legislation represents a targeted change to how residential investment properties are taxed, rather than a full removal of negative gearing. Opportunities remain for investors who understand the eligibility rules, align decisions with long-term investment goals, and plan proactively ahead of implementation.

Talk to our team about how the proposed changes may affect your property portfolio.