A lot of clients have been getting in touch about the negative gearing changes from the May Budget. There's been a fair amount of noise in the media, so we wanted to put together a clear, plain-English summary of what's actually changed, what hasn't, and — most importantly — what it means for you.
What you need to know
If you already own an investment property
This is the most important point for the majority of our clients: if you already own an investment property, nothing changes. The previous rules — including the ability to offset rental losses against your other income in the same tax year — continue to apply without restriction.
The same applies if you had exchanged contracts on an investment property before 12 May 2026, even if settlement hasn't yet occurred. Your existing entitlements are fully preserved. The government made this explicit in the Budget announcement to provide certainty to existing investors.
12 May 2026 is the cut-off. Properties owned or contracted before that date are fully grandfathered under the existing rules. This applies to all established residential investment properties.
New established property purchases from 12 May 2026
If you purchase an established residential property as an investment from 12 May 2026 onwards, and that property runs at a rental loss, you will no longer be able to use that loss to reduce your taxable income in the same year.
Instead, the loss is carried forward. It can be applied against:
- Future rental profits from the same or other investment properties, or
- A capital gain when you eventually sell the property.
The deduction isn't gone — it's deferred. For investors who are planning to hold long-term and expect to sell at a profit, the loss will still be applied eventually. The immediate cash flow benefit, however, disappears for new established purchases.
What is a rental loss?
A rental loss simply means the costs of owning and running a property exceed the rental income it generates. Here's a straightforward example:
Rental income: $30,000
Deductible expenses (interest, rates, depreciation, insurance, management fees): $40,000
Rental loss: $10,000
Under the previous rules, that $10,000 loss could generally be used to reduce the investor's taxable income in the same year — meaning less tax payable that year.
Under the new rules, that $10,000 loss is carried forward and used in future years instead.
What does "carried forward" mean in practice?
Using the same example, the $10,000 loss from Year 1 sits on hold. In Year 2, interest rates fall and rents rise:
Rental income: $42,000
Expenses: $35,000
Rental profit: $7,000
That $7,000 profit is offset against the $10,000 carried-forward loss from Year 1 — meaning no tax is payable on the rental profit in Year 2. The remaining $3,000 loss continues to be carried forward, available to offset future rental profits or a capital gain when the property is eventually sold.
The key difference is timing. Under the old rules you'd get a tax benefit immediately, reducing your income tax bill that year. Under the new rules you have to wait — which matters most to investors who rely on the annual tax saving to fund their holding costs.
SMSF, company and trust investors
The changes apply to individuals investing in their own name — but if you hold property through a structure, the picture is different.
SMSF (Self-Managed Super Fund): SMSFs are generally taxed at 15% in accumulation phase. The negative gearing rules as they apply to individuals don't directly translate to SMSFs — a rental loss inside a super fund cannot be used to offset income outside it regardless. What matters inside an SMSF is the fund's overall income position, and the ATO's treatment of losses within the fund itself. If you're considering purchasing property inside your SMSF, the structuring and borrowing rules under an LRBA (Limited Recourse Borrowing Arrangement) are a more pressing consideration. We'd recommend speaking with your SMSF accountant alongside your broker.
Company and trust investors: The Budget changes are targeted at individual taxpayers using negative gearing to reduce their personal income tax. Properties held in a company structure already cannot pass rental losses through to individual shareholders — companies pay tax at the corporate rate (25–30%) and losses remain within the company. Discretionary trusts (family trusts) are more complex — the trustee distributes income, but rental losses generally cannot be distributed and must be carried forward within the trust in any case. The new rules are largely consistent with how trust losses have been treated for some time. If you hold property in a company or trust and want to understand your specific position, your accountant is the right starting point — but we're happy to discuss the lending structure side of it.
The part that will matter most — borrowing capacity
In our view, the more significant short-term impact isn't the tax treatment itself — it's what the changes are doing to borrowing capacity right now.
When lenders assess how much you can borrow, they factor in the tax benefit of negative gearing. That benefit has historically increased what you could borrow — because part of your rental shortfall was effectively being subsidised by a tax reduction.
Most lenders have already moved to remove that benefit from their serviceability calculations for new established property purchases. They're not waiting for the legislation to pass.
Consider a borrower earning $120,000 a year looking to purchase an established investment property. Under the previous rules, the lender would factor in the annual tax saving from negative gearing — effectively increasing the income available for servicing. Under the new rules, that tax benefit is no longer included in the serviceability calculation.
The result: that same borrower could see their maximum borrowing capacity reduce by as much as $350,000 for an established property purchased after 12 May 2026 — depending on the lender, the property's projected rental income, and their individual circumstances.
This is a rough illustration, not a guarantee. The actual impact depends on your income, existing debts, and which lender you use. We model this against your specific situation as part of any consultation.
This is the part that's happening now, not at tax time. If you're planning to purchase an established investment property in the near future, understanding your current borrowing position — with the new lender calculations applied — is the first conversation worth having.
New builds and house-and-land packages
The changes specifically target established residential properties. Newly constructed properties and house-and-land packages remain eligible for negative gearing under the new rules — the rental loss can still be offset against your current income.
This was a deliberate policy choice to encourage new housing supply. For investors who are weighing up their options, new builds have become considerably more attractive from a tax and borrowing capacity perspective. That said, new builds carry their own considerations — construction timelines, developer risk, and the fact that you're buying in today's market but settling in a future one.
As always, the right structure depends on your individual goals, timeline, and financial position — not just the headline tax rules.
What to do next
If you're an existing investor with no plans to buy more property in the near term — there's nothing urgent you need to action. Your existing loans and tax arrangements are unaffected.
If you're thinking about buying, refinancing, or reviewing your portfolio structure, now is a good time to understand how your borrowing capacity has shifted and whether your current structure still makes sense given the new rules.
Feel free to reach out — we're happy to walk through your specific situation and help you understand what the changes mean for your position.
General information only. This article is general information and does not constitute tax or financial advice. The impact of the May 2026 Budget changes on your individual circumstances will depend on your specific situation. Please speak with your accountant or tax adviser regarding the tax implications, and contact FinanceOnly for guidance on your lending structure.
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