Property investors who bought before May last year can still offset rental losses against their salary. Those who purchased after that date face different rules.
The change applies to established properties bought after 7:30pm AEST on 12 May 2026. Losses on those properties can only be offset against other residential property income from the 2027-28 income year forward. New builds remain unaffected. Properties held before that date retain full negative gearing.
How the Negative Gearing Changes Work
Losses from established residential investment properties purchased after 12 May 2026 are deductible only against income from residential properties, including capital gains, from the 2027-28 income year. Excess losses carry forward to offset residential property income in future years. The grandfathering provision in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 preserves full deductibility for properties held at the announcement date and for all new builds purchased after that date.
Consider a buyer who purchased an established unit in Marrickville in August last year at the suburb's current median. Annual interest costs might sit around $30,000 with rental income covering $26,000. Under the prior rules, that $4,000 shortfall would reduce taxable income from all sources. From the 2027-28 income year, the loss is quarantined and can only offset future property income or capital gains on disposal. The same buyer purchasing a new build in the same suburb at the same time would continue to deduct the full loss against salary.
Capital Gains Tax Indexation from July Next Year
From 1 July 2027, the 50 per cent CGT discount for individuals, trusts and partnerships on residential property is replaced by cost base indexation and a 30 per cent minimum tax rate on capital gains accruing from that date. Investors index the cost base of their assets in line with inflation and pay tax on above-inflation profits only. For new builds, both the existing 50 per cent discount and the new indexation arrangement are available as a choice at disposal.
The shift changes how investors should think about holding periods. Inflation indexing protects real returns in environments where property values grow broadly in line with CPI. The 30 per cent minimum rate applies regardless of the investor's marginal tax rate, which may benefit higher income earners but increase the effective rate for those on lower marginal brackets. Gains accruing before 1 July 2027 remain subject to the 50 per cent discount.
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Structuring Your Loan Around Deductibility
Interest on borrowings used to purchase an investment property remains fully tax deductible, subject to the quarantining rules for losses on post-May 2026 established properties. Interest on borrowings used to purchase an owner-occupied home is not deductible. Where a borrower holds both an owner occupied home loan and an investment loan, keeping the debts separate ensures maximum deductibility and avoids cross-contamination.
In our experience, mixing purposes on a single loan reduces the portion that can be claimed. A linked offset account attached to an investment loan should only hold funds intended to reduce interest on that loan. Depositing personal savings into an offset linked to investment debt reduces the deductible interest without creating a corresponding benefit elsewhere. Conversely, redrawing equity from an investment loan to fund personal expenses converts a portion of that loan to a non-deductible purpose.
Using Offset Accounts to Preserve Deductibility
An offset account linked to an investment loan can hold surplus cash and reduce interest charges while preserving the deductible loan balance. For investors with variable income or those building a deposit for a second property, the offset provides flexibility without permanently reducing the loan principal. Paying down the principal on an investment loan reduces deductible debt. Paying down an owner-occupied loan and using an offset on investment debt keeps the deductible balance intact.
If you plan to convert your current owner-occupied home to an investment property in future, consider using an offset rather than making extra repayments. The moment the property becomes income-producing, the outstanding loan balance at that time becomes deductible. A lower principal due to extra repayments reduces the amount you can claim. This matters particularly for Sydney residents moving between suburbs for work or family and retaining the original property as a rental.
Prepaying Interest Before 30 June
Borrowers can prepay up to 12 months of interest on an investment loan and claim the deduction in the year the payment is made, provided the loan term exceeds 12 months and the prepayment is made before the end of the financial year. This approach suits investors who expect a higher marginal tax rate in the current year or who want to bring forward deductions to offset a capital gain.
Prepayment applies only to interest, not principal. The lender must agree to accept the prepayment and apply it correctly. Some lenders charge a fee or do not offer prepayment functionality. The deduction is claimed in the year the payment is made, even though the interest relates to the following year. Prepaying interest on an owner-occupied loan provides no tax benefit.
Claiming Depreciation and Borrowing Costs
Depreciation on plant and equipment and capital works deductions remain available for investment properties, subject to existing rules that limit plant and equipment depreciation to new builds for assets installed after 9 May 2017. Borrowing costs including lender application fees, valuation fees, and loan establishment fees incurred when taking out or increasing an investment loan are deductible over five years or the term of the loan, whichever is shorter.
Legal costs associated with purchasing an investment property are not deductible as an outgoing but form part of the cost base for CGT purposes. Ongoing loan account keeping fees and mortgage offset account fees on an investment loan are deductible in the year they are incurred. Lenders mortgage insurance is a borrowing cost and is deductible over five years or the loan term. For borrowers considering refinancing an investment loan, the unamortised portion of the original borrowing costs may be deductible in the year of refinance if the original loan is fully discharged.
The First Home Super Saver Scheme as a Deposit Strategy
The FHSS Scheme allows first home buyers to make voluntary concessional and non-concessional contributions into superannuation and apply to release eligible amounts toward a home deposit. Up to $15,000 of personal contributions from any one financial year can be released, with a total cap of $50,000. Concessional contributions are taxed at 15 per cent rather than at marginal income tax rates.
For a first home buyer on a marginal tax rate above 32.5 per cent, the tax saving on contributions can be material. The released amount includes earnings, though a withdrawal tax applies on release. Buyers generally need to obtain a determination from the ATO before signing a purchase contract. The scheme works alongside state and territory grants and the Australian Government 5% Deposit Scheme, though timing and sequencing matter. Contributions must be made in advance, so buyers need to plan at least one or two financial years before purchasing.
Frequently Asked Questions
Can I still negatively gear an investment property purchased in Sydney?
Properties held before 7:30pm AEST on 12 May 2026 retain full negative gearing. For established properties bought after that date, losses can only offset other residential property income from the 2027-28 income year. New builds purchased after May last year are not affected and losses remain fully deductible against all income.
How does the new capital gains tax indexation work from July 2027?
From 1 July 2027, the 50 per cent CGT discount on residential property is replaced by cost base indexation and a 30 per cent minimum tax rate on gains accruing from that date. Investors index their cost base with inflation and pay tax on above-inflation profits only. New build investors can choose between the discount and indexation at disposal.
Should I use an offset account or pay down my investment loan principal?
An offset account reduces interest while preserving the deductible loan balance. Paying down the principal permanently reduces deductible debt. For investors building deposits for future purchases or planning to convert an owner-occupied home to investment, using an offset maintains flexibility and maximises future deductibility.
Can I claim interest on a loan used to buy an owner-occupied home?
No. Interest on borrowings used to purchase an owner-occupied home is not tax deductible. Only interest on loans used to purchase income-producing assets, such as investment properties, can be claimed as a deduction.
What borrowing costs can I claim on an investment property loan?
Lender application fees, valuation fees, loan establishment fees and lenders mortgage insurance are deductible over five years or the loan term, whichever is shorter. Ongoing account keeping fees are deductible in the year incurred. Legal costs for purchasing the property form part of the cost base for capital gains tax purposes.
