The 2025 Federal Budget proposed restricting negative gearing on established residential property from 1 July 2027. The measure is not yet legislated as of late 2026, but it has already changed how investors are weighing acquisitions, hold periods and ownership structures. This post walks through what the proposal actually does, who it applies to, and what the numbers look like for a representative Sydney investment property.
What the proposal changes
Under current law, an investor running a net loss on a residential rental property (rent minus interest, expenses and depreciation) can offset that loss against salary or other income. That is “negative gearing.” The tax saving from the offset reduces the after-tax cost of carrying the property.
The proposed reform quarantines net property losses on established residential property acquired after Budget night, so they cannot offset salary or non-property income from the 2027–28 income year onward. The loss does not disappear: it carries forward indefinitely and can be used against future residential rental income - nothing else.
Two important narrowings:
- Established residential only. New residential dwellings are excluded from the restriction in the current proposal. The Budget paper frames this as encouraging new housing supply.
- Capital losses do not convert. Quarantined revenue losses cannot be converted to capital losses against the property’s eventual CGT gain. They can only be applied to other residential rental income in future years.
Who it applies to
The proposal targets investors who hold (or buy) established residential investment property after Budget night and who run a net rental loss for tax purposes. In practice that is most leveraged investors: at typical 2026 interest rates a $1.2M loan on a $1.6M property produces an interest bill of roughly $78,000 a year, against around $73,000 in gross rent. Add depreciation and other expenses and almost every leveraged residential property is loss-making before tax.
It does not apply to:
- New residential dwellings (under the current proposal).
- Commercial property.
- Properties that run a net taxable profit (no quarantined loss to worry about).
- Properties owned via structures where the loss already cannot stream to a low-rate beneficiary - e.g. a discretionary trust where the loss has to be carried forward inside the trust regardless.
Statutory references
The current negative-gearing position sits across several provisions of the Income Tax Assessment Act 1997:
- s 8-1 - the general deduction rule that allows interest and most outgoings on a rental property to be deducted.
- Div 36 - tax losses (current treatment).
- Div 40 / Div 43 - depreciation on plant & equipment and capital works; both factor into the net property result.
- s 40-27 - restriction on Division 40 deductions for previously-used plant in established residential, acquired after 9 May 2017. Already in force; the 2027 proposal sits on top of this.
The 2027 quarantine itself is announced in the 2025 Federal Budget (Treasury, 25 March 2025). The legislative vehicle had not been introduced at time of writing.
Worked example: a sample Sydney property
Numbers below are pulled from the Byrz sample report (joint personal ownership, $1.6M established Sydney residential property, $1.2M IO loan at 6.5%, $72,800 annual rent, 6-year hold to 2032). The full report covers more axes but these are the negative-gearing line items.
| Line (totals over the 6-year hold) | Current law | Under reform | Change |
|---|---|---|---|
| Gross rental income | $458,134 | $458,134 | · |
| Interest expense | −$451,503 | −$451,503 | · |
| Operating expenses + land tax | −$118,893 | −$118,893 | · |
| Depreciation claimed | −$101,299 | −$101,299 | · |
| Taxable property result | −$213,562 | −$213,562 | · |
| Tax saving (offset against salary) | +$80,626 | +$12,699 | −$67,927 |
| After-tax cashflow over hold | −$128,861 | −$196,788 | −$67,927 |
Two observations:
- The property’s economics do not change. Rent, interest, expenses and depreciation are identical. Reform targets the salary offset, not the property itself.
- The salary-offset shrinks from $80,626 over six years to $12,699. That −$67,927 lost saving is almost exactly the worsening in after-tax cashflow. The quarantined loss is still there, carried forward against future residential rental income, but it stops working as a real-time salary shield.
What it means for the decision
Negative gearing on its own is rarely the reason to buy a property - the property has to make sense on rent + capital growth first. But for a leveraged investor on a high marginal rate, the salary offset has historically been a meaningful part of the carry. The proposal removes that lever, which raises three questions an investor should run the numbers on:
- Does the property still make sense without the offset? If after-tax cashflow turns severely negative and the investor needs the salary refund to fund repayments, the shape of the deal has changed.
- Is the carried-forward loss usable? It only offsets future residential rental income. An investor with no plans to acquire more residential rental will see the loss sit unused indefinitely.
- Does a different ownership structure change the calculus? Some structures (SMSF pension, in particular) have a 0% headline rate on income and gains, but bring access, borrowing and compliance constraints. The cost of moving in to that structure (stamp duty, CGT crystallisation, refinance, setup) is often material.
Caveats
The 2027 negative-gearing restriction is a proposal. Final legislation, regulations and ATO guidance may change the scope (which classes of dwelling are caught, the start date, the transitional rules). The Budget paper’s framing has held steady but the wording in the eventual Bill will matter.
Treat any modelling - this article’s example included - as scenario planning, not financial advice. Numbers above assume a representative high-income joint personal ownership scenario; your marginal rate, depreciation profile, land-tax exposure and refinance terms shift them.
If you want to see the same calculation against your own property and structure, the Byrz sample report is the full output the table above is drawn from. A property report runs the same engine against your inputs.