Negative Gearing Changes 2026

Author: John Pierre Saliba — 10-year mortgage broker | Bachelor of Business & Commerce | Diploma in Mortgage Broking & Finance | Advanced Diploma in Financial Planning | MFAA Accredited

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Negative gearing reform is no longer a theoretical debate. Treasurer Jim Chalmers has confirmed that Treasury is actively modelling changes to both negative gearing and the capital gains tax discount ahead of the May 2026 federal budget. A Senate Select Committee examined the CGT discount through hearings in February 2026, and the Parliamentary Budget Office has already costed specific proposals.

For the 2.26 million Australians who own at least one investment property, and for anyone planning to buy one, these proposed changes could fundamentally alter the economics of property investment in this country. Whether the changes are implemented in full, in part, or not at all, every investor needs to understand what is being proposed, how it would affect their position, and what actions they should consider before the budget is handed down.

At Lend & Loan in Barangaroo, we work with property investors every day — from first-time investors buying their first rental to experienced portfolio holders managing multi-million-dollar loan books. This guide cuts through the political noise and explains exactly what the proposed changes mean for your loans, your borrowing power, your cash flow, and your long-term wealth strategy.

Chapter 1: What Is Negative Gearing and Why Does It Matter?

How Negative Gearing Works

Negative gearing occurs when the costs of owning an investment property exceed the rental income it generates. The "costs" include loan interest, property management fees, council and water rates, strata levies, landlord insurance, maintenance, and depreciation. When these costs exceed the rent you receive, the resulting loss is called a negative gearing loss.

Under current Australian tax law, this loss can be offset against your other taxable income — typically your salary or wages. If your investment property generates a loss of $12,000 and your marginal tax rate is 37 percent plus 2 percent Medicare levy, the loss reduces your tax bill by $4,680. In effect, the government is subsidising 39 percent of your investment property shortfall.

The strategy works because investors accept a manageable annual loss in exchange for long-term capital growth. If a $700,000 property grows by 5 percent per year, that is $35,000 in equity growth — far exceeding the after-tax cost of the annual shortfall.

Negative gearing has been a feature of the Australian tax system for decades. It applies not just to property but to any income-producing investment, including shares. However, property investors are by far the largest group of negative gearers, and property is where the political debate is focused.

Why It Is Under Review

The government's stated motivation for examining negative gearing is housing affordability. The argument is that tax incentives for investors increase demand for housing, pushing up prices and making it harder for owner-occupiers — particularly first home buyers — to compete. By restricting negative gearing, the government hopes to reduce investor demand and moderate price growth.

Critics of reform argue that negative gearing encourages investment in rental housing, increasing the supply of rental properties and putting downward pressure on rents. They point out that restricting negative gearing could reduce the rental supply, pushing rents even higher in an already tight market. Australia's national vacancy rate is well below 2 percent in most capital cities, and rents have already increased significantly over the past three years.

The economic reality is that both sides have valid points, and the actual impact of any reform will depend heavily on the specific design of the changes and the broader economic context in which they are implemented.

Chapter 2: The Proposed Changes — What Is on the Table

Proposal 1: Two-Property Cap on Negative Gearing

Treasury is reportedly modelling rules that would limit full negative gearing deductions to a maximum of two investment properties per investor. If you own three or more investment properties, the rental losses on your additional properties (third, fourth, fifth, and beyond) would be quarantined.

Quarantined losses cannot be offset against your salary, wages, or other non-rental income. Instead, they can only be carried forward and offset against future rental income from those specific properties, or against capital gains when those properties are eventually sold.

In practical terms, this means that an investor with three properties who generates a combined rental loss of $20,000 would only be able to claim the losses from two of those properties against their salary. The loss from the third property would sit in a quarantine pool until the property generates positive cash flow or is sold.

ATO data from the 2022–23 financial year shows there are approximately 2.26 million individual property investors in Australia. Of those, roughly 214,700 — about 9.5 percent — own three or more properties. Approximately 452,700 individual investment properties would be affected by the cap, representing the third, fourth, and subsequent holdings of multi-property investors.

This means the vast majority of property investors — over 90 percent — would be completely unaffected by a two-property cap. The changes target portfolio investors, not mum-and-dad investors with one or two rentals.

Proposal 2: Reduced CGT Discount

The government is also considering reducing the capital gains tax discount from the current 50 percent to a lower figure. Various proposals have been modelled, including reductions to 33 percent and 25 percent.

Under the current rules, if you sell an investment property that you have held for more than 12 months and make a capital gain of $300,000, only $150,000 is included in your taxable income (50 percent discount). At a marginal rate of 37 percent plus Medicare levy, the tax is approximately $58,500 — an effective rate of 19.5 percent on the full gain.

Under a 33 percent discount (67 percent included in income), the tax on the same $300,000 gain would be approximately $78,390 — an increase of $19,890. Under a 25 percent discount (75 percent included), the tax would be approximately $87,750 — an increase of $29,250.

These are not trivial differences. For investors who hold properties for long periods and benefit from substantial capital growth, a reduced CGT discount meaningfully changes the after-tax return on sale.

Grandfathering — The Critical Detail

The most credible analysis from property economists and policy commentators suggests that any changes would be grandfathered. This means properties purchased before the new rules commence would retain the current settings — full negative gearing deductibility and the 50 percent CGT discount.

Grandfathering is the standard approach to major tax reform in Australia because it avoids retrospective application (which would be politically toxic) and provides certainty to existing investors who made decisions based on the current rules.

If grandfathering is confirmed, buying investment property before the legislation is introduced would lock in the current, more favourable tax treatment for the life of that investment. This is a significant strategic consideration for anyone contemplating an investment property purchase in 2026.

Timeline

The federal budget is expected in May 2026. If changes are announced in the budget, legislation would need to pass Parliament. Given the political sensitivity of negative gearing reform and the relatively narrow parliamentary margins, there is no guarantee that any proposal will be legislated in its current form — or at all.

However, the direction of travel is clear. The government has committed significant political capital to examining these reforms, and at minimum, some form of change to either negative gearing, the CGT discount, or both appears likely within the next 12 to 24 months.

Chapter 3: How the Changes Would Affect Your Loans and Borrowing Power

Impact on Borrowing Capacity

Lenders do not directly use negative gearing tax benefits in their serviceability calculations — they assess your ability to repay the loan based on gross income, existing debts, and living expenses, with a 3 percent interest rate buffer applied.

However, if negative gearing deductions are reduced or quarantined, your after-tax cash flow from investment properties worsens. This means you need more of your own income to cover the shortfall, which reduces the amount of surplus income available for new borrowing.

For an investor with two properties seeking to purchase a third, the quarantining of losses on the third property could reduce their effective disposable income by several thousand dollars per year, which flows through to lower borrowing capacity. The exact impact depends on the size of the loss, your marginal tax rate, and the lender's specific assessment methodology.

Impact on Cash Flow

The most immediate impact of a negative gearing cap would be felt in cash flow. If you currently offset $15,000 in rental losses against your salary and your marginal rate is 39 percent, you receive a tax benefit of $5,850 per year. If those losses are quarantined, that $5,850 benefit disappears — and your after-tax cost of holding the property increases by that amount.

On a monthly basis, that is approximately $488 per month in additional after-tax cost. For investors who are already stretching to hold their properties, this could create genuine financial pressure.

Impact on Loan Structure

If negative gearing is restricted, the optimal loan structure for investment properties may change. Currently, many investors use interest-only loans to maximise their deductible interest and reduce cash flow strain. If the deductibility of losses is quarantined, the benefit of maximising deductible interest diminishes — and paying principal and interest (building equity faster) may become relatively more attractive.

Additionally, investors may need to reconsider the balance between their owner-occupier and investment loans. The strategy of minimising non-deductible home loan debt while maximising deductible investment debt becomes less powerful if the deductibility of investment losses is restricted.

> Want a portfolio health check before the budget? Call Lend & Loan on 02 8046 3933 or book a free investment loan review. We will model the impact of proposed changes on your specific portfolio.

Chapter 4: What Should You Do Right Now?

If You Own One or Two Investment Properties

You are largely unaffected by the proposed two-property cap. Your negative gearing deductions would continue as normal. However, if you are planning to expand to three or more properties, you should accelerate your timeline if the investment fundamentals support it — purchasing before any legislation takes effect would likely mean grandfathering under the current rules.

The CGT discount change would affect you regardless of how many properties you own, but only when you sell. If you are a long-term holder with no plans to sell in the near future, the immediate impact is minimal. If you are considering selling, doing so before any CGT changes take effect (likely the next financial year at the earliest) would lock in the current 50 percent discount.

If You Own Three or More Investment Properties

You are the target demographic for the proposed cap. The quarantining of losses on your third and subsequent properties would increase your after-tax holding costs. You should review the cash flow on each property to understand which would be most affected, consider whether any properties should be sold before the changes take effect, and ensure your loan structures are optimised for the new environment.

Speak to your accountant about modelling the after-tax impact under the proposed rules so you can make informed decisions rather than reacting to headlines.

If You Are Planning to Buy Your First Investment Property

If the investment fundamentals are sound — strong location, realistic yield, manageable cash flow — buying before any legislation is introduced is a smart move. Grandfathering would protect your current investment under existing rules, and the two-property cap would not affect you until you are considering a third property.

Do not rush into a bad purchase simply to beat a policy change. A poorly located property with weak fundamentals is a bad investment regardless of the tax settings. But if you have been sitting on the fence waiting for the "right time," the prospect of less favourable tax treatment in the future adds urgency.

If You Are Considering Selling

If you have been thinking about selling an investment property, the potential reduction in the CGT discount is a factor worth considering. Selling before any legislative change takes effect would allow you to access the current 50 percent discount.

However, selling triggers immediate capital gains tax (even at the discounted rate), transaction costs, and the loss of future capital growth and rental income. The decision to sell should be based on a comprehensive analysis of your overall portfolio and financial position, not solely on a potential tax change that may or may not materialise.

Chapter 5: Strategies That Work Regardless of the Tax Settings

Focus on Yield, Not Just Growth

Properties that generate a neutral or positive cash flow before tax are naturally less dependent on negative gearing benefits. If your investment property is cash flow positive — meaning the rent covers all expenses including interest — changes to negative gearing deductibility have zero impact on your holding costs.

This shifts the investment focus from high-growth, low-yield properties (which rely heavily on negative gearing to manage cash flow) toward higher-yield properties that generate real income. Suburbs with vacancy rates below 1 percent, strong tenant demand, and rents that cover or exceed ownership costs become more attractive under any negative gearing restriction.

Build Equity Faster

The faster you pay down your investment loan, the lower your interest costs, and the less reliant you are on negative gearing benefits. Making additional repayments, using an offset account effectively, or switching from interest-only to principal and interest all accelerate equity growth and improve your cash flow position over time.

Diversify Your Portfolio

Rather than concentrating multiple properties in the same market, consider diversifying across property types (houses and apartments), locations (different states or regions), and even asset classes (property plus shares or managed funds). Diversification reduces your exposure to any single policy change, market downturn, or rental vacancy.

Review Your Entity Structure

Some investors may benefit from holding properties through different entity structures — personal name, company, or family trust. Each structure has different tax treatment, and the optimal structure may change if negative gearing rules are modified. This is a conversation to have with your accountant, not your mortgage broker — but your broker can advise on how different structures affect your lending options and borrowing capacity.

Maintain a Cash Buffer

In a higher-rate, potentially less tax-advantaged environment, having a cash buffer of three to six months of investment property expenses (including loan repayments) provides a safety net against vacancy, unexpected repairs, or increased holding costs. An offset account is the most efficient place to hold this buffer, as it reduces your interest costs while remaining fully accessible.

Chapter 6: The Bigger Picture — Does Property Investment Still Work?

The Fundamentals Have Not Changed

Regardless of what happens with negative gearing and the CGT discount, the fundamental drivers of property investment in Australia remain intact. Population growth continues to outpace new housing supply. Construction costs and planning constraints limit the development pipeline. Rental demand is at historic highs with vacancy rates at record lows. Leverage allows you to control appreciating assets with a fraction of the purchase price. And Australian property has delivered average annual growth of 6 to 7 percent over the long term.

Tax incentives enhance investment returns, but they are not the primary reason property investment works. Capital growth is the wealth driver. A property growing at 6 percent per year doubles in value in approximately 12 years, regardless of the tax treatment of losses along the way.

The investors who will be best positioned regardless of what happens are those who buy quality properties in strong locations, hold for the long term, maintain manageable debt levels, and do not over-rely on tax benefits to make the numbers work.

What History Tells Us

Australia briefly abolished negative gearing between 1985 and 1987. The result was a sharp reduction in rental supply, significant rent increases (particularly in Sydney and Perth), and significant political pressure that led to its reinstatement. This historical precedent is one reason most commentators believe an outright abolition is unlikely — the more probable outcome is a restriction or cap rather than full removal.

The proposed two-property cap is designed to be politically palatable — it affects only 9.5 percent of property investors while allowing the government to claim meaningful reform. Whether it achieves its stated goal of improving housing affordability is a separate question that economists debate vigorously.

Chapter 7: Frequently Asked Questions

What Lend & Loan Can Do for You

The prospect of tax reform can feel overwhelming, but the practical steps are straightforward. Review your current portfolio. Understand your cash flow under different scenarios. Ensure your loan structures are optimal. And if you are planning to buy, make informed decisions based on data rather than headlines.

At Lend & Loan, we help investors navigate exactly these situations. We can review your existing loan structures (see our refinancing guide), model the cash flow impact of proposed changes, identify refinancing opportunities to improve your position, and help you structure new investment purchases (see our SMSF property guide for super-based strategies) for maximum flexibility.

Chapter 8: The Depreciation Factor — An Often Overlooked Consideration

How Depreciation Interacts with Negative Gearing

Depreciation is a non-cash deduction that significantly contributes to many investment properties being negatively geared. On a newer property, first-year depreciation claims of $10,000 to $19,000 are common — and these deductions do not cost the investor a single dollar in actual expenditure.

If negative gearing is restricted, the value of depreciation deductions changes. Under the current system, a $15,000 depreciation deduction contributes to a larger negative gearing loss, which is then offset against your salary at your marginal rate. If those losses are quarantined, the depreciation still creates a paper loss, but the immediate tax benefit is deferred rather than received annually.

This does not mean depreciation becomes worthless. Quarantined losses can still be offset against future rental income or capital gains when the property is sold. But the cash flow benefit — receiving a tax refund each year that effectively reduces your holding cost — is diminished or delayed.

For investors relying heavily on depreciation to make the numbers work, this is a meaningful change. Properties that are negatively geared purely because of depreciation (rather than because of actual cash losses) may need to be re-evaluated if the losses cannot be immediately claimed against other income.

The 2017 Depreciation Rule Change — A Precedent

In 2017, the government restricted plant and equipment (Division 40) depreciation claims on established investment properties purchased after 9 May 2017. Second-hand fixtures and fittings — carpets, blinds, hot water systems, air conditioning units — could no longer be depreciated by the new owner.

This change reduced the tax benefits of owning established investment properties and shifted the depreciation advantage toward new and near-new properties. It also demonstrated the government's willingness to modify investment property tax settings incrementally — a pattern that may continue with the 2026 proposals.

Chapter 9: State-Level Considerations — Land Tax and Beyond

The Double Squeeze

Property investors in some states face a double squeeze in 2026: potential federal negative gearing restrictions combined with existing (and in some cases increasing) state-level land tax obligations.

In New South Wales, the land tax threshold is $1,075,000 for the 2025–2026 financial year. Many investors with a single Sydney property fall below this threshold (remember, land tax is based on unimproved land value, not total property value). However, as land values rise, more investors are crossing the threshold without buying additional property — simply because their existing land has appreciated.

Victoria presents a far more challenging picture. The land tax threshold is just $50,000, meaning virtually every investment property in the state attracts land tax. Combined with COVID-era temporary levies that have been extended and trust surcharges that lower the threshold further, Victoria is currently the most expensive state for land tax on investment properties.

Queensland has a threshold of $750,000 for individuals, which is relatively generous, but it drops to $350,000 for trusts and companies.

If your investment property portfolio spans multiple states, the interaction between federal negative gearing changes and state land tax obligations requires careful modelling. The combined effect on after-tax holding costs could be significant — particularly for Victorian-based investments.

Structuring Across States

One strategy that some portfolio investors consider is geographic diversification to manage land tax exposure. Because land tax is calculated separately in each state, holding properties across two or three states can effectively provide multiple tax-free thresholds. An investor with $900,000 in land value in NSW (below the $1,075,000 threshold) and $600,000 in land value in Queensland (below the $750,000 threshold) pays zero land tax in either state — whereas holding $1.5 million in land value in a single state would trigger significant annual land tax.

This is a legitimate planning strategy, but it adds complexity to portfolio management and lending structures. At Lend & Loan, we help investors structure loans across multiple states and lenders to optimise both tax efficiency and lending flexibility.

Chapter 10: Worked Portfolio Examples

Example 1: Two-Property Investor (Unaffected by Cap)

Michael owns two investment properties — a $650,000 apartment in Parramatta generating $520 per week in rent, and a $750,000 townhouse in Brisbane generating $580 per week. Both properties are negatively geared.

Under the proposed two-property cap, Michael is completely unaffected. His negative gearing deductions on both properties continue as normal, offset against his $130,000 salary. His combined rental losses of approximately $18,000 reduce his tax by approximately $7,020 per year (at 39 percent marginal rate including Medicare). No change.

If the CGT discount is reduced from 50 percent to 33 percent, Michael would be affected when he sells — but only on gains accrued after the new rules commence (assuming grandfathering applies to existing gains). For a long-term holder, this may be decades away.

Example 2: Four-Property Investor (Directly Affected)

Sandra owns four investment properties with a combined value of $3.2 million and combined loans of $2.4 million. Her total annual rental income is $124,800 and her total annual expenses (including interest) are $178,000, generating a combined negative gearing loss of $53,200.

Under current rules, this $53,200 loss reduces Sandra's tax bill by approximately $20,748 per year (at 39 percent marginal rate). Under the proposed cap, losses from properties three and four would be quarantined. If those two properties contribute $22,000 of the total loss, Sandra would lose approximately $8,580 per year in tax benefits.

That is $715 per month in additional after-tax holding cost. Manageable for Sandra, whose salary is $185,000, but it represents a meaningful reduction in the return on her portfolio. Sandra should consider whether any of the four properties is underperforming and might be worth selling, whether restructuring loans (moving from interest-only to principal and interest on the quarantined properties) would improve her overall position, and whether holding properties across different entity structures might provide any benefit.

Example 3: First-Time Investor Considering a Purchase

Alex earns $110,000 and is considering purchasing a $680,000 investment apartment in Western Sydney. The property would generate $480 per week in rent and produce a negative gearing loss of approximately $8,500 per year (after depreciation).

Under current rules, this loss saves Alex approximately $3,315 in tax (at 39 percent). Under the proposed changes, this would be Alex's first investment property — well within the two-property cap — so negative gearing would continue as normal.

If Alex buys before any legislation is introduced and grandfathering applies, the current 50 percent CGT discount would be locked in for this property. If Alex waits and the discount is reduced to 33 percent, the after-tax return on sale (potentially decades from now) would be lower.

The conclusion: for a first or second investment property, the proposed changes provide an additional reason to act sooner rather than later.

What Lend & Loan Can Do for You — Taking Action

The prospect of tax reform creates anxiety, but anxiety without action is wasted energy. Here is a practical timeline for what to do between now and the budget.

In April 2026, book a portfolio review with your mortgage broker and your accountant. Understand your current cash flow position on each property. Identify which properties would be affected by a two-property cap. Model the after-tax impact under different scenarios — full cap implementation, CGT discount reduction to 33 percent, and the combination of both changes.

If you are considering purchasing a new investment property and the fundamentals are sound, April and early May represent a strategic window. Properties purchased before any legislation is introduced are most likely to be grandfathered under the current rules. At Lend & Loan, we can fast-track pre-approval and identify the best investment loan for your situation within days.

If you are considering selling a property that has appreciated significantly, speak to your accountant about whether crystallising the gain under the current 50 percent CGT discount — before any potential reduction — makes financial sense within your broader strategy. Remember that selling triggers immediate transaction costs and tax liability, so this decision should not be made in isolation.

If you own three or more properties, review each one's individual performance. Is every property pulling its weight? Are there underperformers that you have been holding purely for the tax benefit? If negative gearing deductibility is restricted on your third and subsequent properties, the holding cost of underperforming assets increases — and selling a poor performer to strengthen the remaining portfolio may be the right call.

After the May 2026 budget, reassess. If changes are announced, review the specific legislation, the grandfathering provisions, and the implementation timeline. If no changes are announced, continue as normal — but remain vigilant, as the government has signalled that reform remains on the agenda.

Throughout this process, your mortgage broker and your accountant should be working together. At Lend & Loan, we coordinate directly with our clients' accountants to ensure that loan structuring and tax strategy are aligned. There is no point restructuring your loans for tax efficiency if the structure does not work from a lending perspective, and vice versa.

The bottom line is this: good property in strong locations with sound fundamentals will continue to build wealth regardless of the tax settings. The investors who thrive through policy changes are those who plan ahead, stay informed, and make decisions based on data — not fear.

Call us on 02 8046 3933 or visit lendloan.com.au/contact for a free investment portfolio review.

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