By Paul Feeney, Founder and Chief Executive Officer, Otivo
At 7:30pm on 12 May 2026, the maths of Australian property investing split in two. Anything already owned or under contract at that moment keeps its current tax treatment for as long as it's held; almost any established property bought afterwards will have its rental losses quarantined from 1 July 2027. That single timestamp now shapes the buy-new-versus-established decision for every prospective investor. Here's how the proposed rules work, who's protected, and where the traps sit.
Under new negative gearing rules announced in the 2026–27 Federal Budget, rental losses on established properties bought after 7:30pm AEST on 12 May 2026 will be quarantined from 1 July 2027 — deductible only against other residential property income, including capital gains. New builds are exempt, properties held before the announcement are grandfathered, and the legislation is currently before parliament.
How will the new rules work?
Negative gearing occurs when an investment property's deductible costs — loan interest, maintenance, depreciation — exceed its rental income, producing a loss that can currently be deducted against any other income, including salary. The 2026–27 Federal Budget proposes ending that arrangement for most newly purchased established homes. According to the ATO's summary of the measure, from 1 July 2027 the offset will be limited to new builds.
For an established residential property bought after 7:30pm AEST on 12 May 2026, rental losses will only be deductible against income from other residential property — net rent from another investment, or a capital gain on sale. Anything left over is carried forward to future years.
Two design details matter. The quarantine works at the portfolio level, not property by property: a loss on one property can absorb net rent from another, including a new build. And quarantined losses aren't cancelled — they're deferred. They can reduce a future capital gain, though if the eventual gain is smaller than the accumulated losses, part of the deduction can be lost for good.
Who keeps the old rules?
Grandfathering is the broadest protection in the package. Any residential property held at 7:30pm AEST on 12 May 2026 — including one under contract but not yet settled — keeps full access to negative gearing until it's sold. There's no expiry: a grandfathered property bought in 2015 could still be claiming rental losses against salary in 2040, provided it hasn't changed hands.
There's also a transitional window for everyone else. An established property purchased after the announcement can still be negatively geared up to 30 June 2027. The quarantining only starts on 1 July 2027 — so a property settled in, say, August 2026 gets nearly a year of deductions under the old treatment before the new one begins.
One detail the budget papers leave open is the treatment of homes owned at the announcement but rented out later — a former main residence converted to an investment property, for example. Tax commentators have flagged this as unresolved, which is one reason the final legislation is worth reading closely.
What counts as a new build?
The 2026–27 Budget papers draw the line with examples rather than a single sentence. On the eligible side sit a newly constructed apartment bought off the plan, any residential construction on previously vacant land, a duplex replacing a single free-standing house in a knock-down rebuild, and a newly built property occupied for less than 12 months before its first sale. On the ineligible side: an established house that's been extended, a one-for-one knock-down rebuild, a granny flat added beside an existing home, and a newly built property occupied for more than 12 months before being sold to a subsequent investor.
Why near-new isn't new
That last pairing is the trap. A two-year-old townhouse bought from its original owner is treated as established, even though it's barely been lived in. A property's tax status under the proposal travels with its history, not its age — which makes the occupancy record one of the most consequential lines in any due-diligence file.
The grandfathered, the exempt and the quarantined
Under the proposal, every residential investment property falls into one of three groups.
- The grandfathered — properties held, or under contract, at 7:30pm AEST on 12 May 2026. The old rules apply until sale.
- The exempt — eligible new builds, properties held in widely held trusts and superannuation funds, and proposed carve-outs for build-to-rent developments and investors participating in government housing programs.
- The quarantined — established properties purchased after the announcement by individuals, partnerships, companies and most trusts. From 1 July 2027, their losses offset residential property income only.
Knowing which group a property falls into is the first question; everything else in the new regime follows from it.
What do the changes mean for your next purchase?
For prospective investors, the proposal changes the relative economics of new and established property rather than the case for property itself. Three shifts stand out.
First, cash flow. An established property bought now will, from July 2027, carry its losses forward rather than reducing each year's tax bill. The shortfall still has to be funded from rent and household income in the meantime — a meaningful difference for anyone who was counting on the annual deduction to make the repayments work.
Second, the exit. The capital gains tax settings are changing alongside gearing. The 50% CGT discount is proposed to be replaced with cost base indexation and a minimum 30% tax rate on capital gains from 1 July 2027, applying only to gains that accrue after that date. New-build investors can choose between the 50% discount and the new arrangements; buyers of established property can't.
Third, the existing stock. Because grandfathering lasts until sale, owners of pre-announcement properties now have a fresh reason to hold rather than sell — which may affect how much established stock reaches the market in the years ahead.
None of this makes one choice right for everyone. Yields, land value, location, vacancy rates and build quality all still matter, and tax treatment is only one input. Many investors find it useful to model the after-tax cash flow both ways before committing. A licensed financial adviser — or a digital advice platform like Otivo, which holds AFSL and Australian Credit Licence No. 485665 — can help put numbers around the surrounding trade-offs.
Are the negative gearing changes law yet?
Not yet. The measures sit in the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026, which was before federal parliament as at June 2026, and the ATO notes the measure "is not yet law". The start date, exemption boundaries and definitions could still shift during parliamentary debate. What's unlikely to move is the 12 May 2026 cut-off — announcement-date effectiveness is standard for measures designed to head off a rush of transactions before new rules begin.
Frequently asked questions
Can a property bought before 12 May 2026 still be negatively geared?
Yes. Properties held — or under contract — at 7:30pm AEST on 12 May 2026 are grandfathered under the rules proposed in the 2026–27 Federal Budget, and keep access to negative gearing until they're sold.
What happens to quarantined losses when a property is sold?
Carried-forward losses can be offset against residential property income in future years, including a capital gain on sale. If the gain is smaller than the accumulated losses, the unused portion may never be deducted — a timing rule that can become permanent.
Do the new rules apply to new builds?
No. Eligible new builds keep negative gearing, and their investors can choose between the existing 50% CGT discount and the proposed indexation arrangements. Eligibility generally turns on the property being genuinely new — including a test based on occupancy of less than 12 months before first sale.
When do the changes take effect?
From 1 July 2027, subject to the legislation passing. Established properties bought after 7:30pm AEST on 12 May 2026 can still be negatively geared until 30 June 2027 under transitional arrangements.
An investment property rarely stands alone — it usually sits beside a mortgage, a super balance and a retirement plan. Otivo's online advice modules cover the surrounding pieces, from paying down debt faster to retirement planning that accounts for investments outside super. If the new rules have prompted a rethink of the bigger picture, that can be a practical place to start.
Disclaimer
The information in this communication is current as at June 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.