Negative gearing gets talked about a lot in debates about housing and the federal budget, but it is not always explained all that clearly.
Here we'll go through what negative gearing means, what the 2026-27 federal budget announced, how the proposed rules would treat new builds and established housing differently, why capital gains tax keeps coming up, and what details still need to be worked through.
Why has negative gearing been back in focus?
One reason negative gearing has become such a live issue is that it’s not just a technical tax topic. It now sits inside a wider debate about housing affordability, whether younger Australians have a fair shot at home ownership, and whether the tax system is giving investors too much of an edge over people trying to buy a home to live in.
The Senate set up a select committee in November 2025 to examine the capital gains tax discount and related issues, and when it reported in March 2026 it said there was evidence that the capital gains tax discount, together with negative gearing, had shifted housing ownership away from owner-occupiers and towards investors, with implications for intergenerational inequality.
The government has framed the recent discussion about negative gearing around housing and intergenerational equity, not just tax.
What did the 2026-27 federal budget announce?
The government announced it intends to limit negative gearing to new home builds from 1 July 2027.
Under the announced model:
- Existing arrangements will remain unchanged for all properties held before budget night.
- Investors who buy new builds will still be able to deduct losses from other income.
- Investors who buy established housing after budget night will still be able to deduct losses against residential property income.
- Those investors will be able to carry forward unused losses to future years, but will not be able to deduct those losses against other income such as wages.
The final legislation should clarify practical issues such as contract dates, settlement dates, off-the-plan purchases and what exactly counts as a new build.
What does negative gearing actually mean?
Surprisingly, according to the federal Treasury, you won’t find the phrase “negative gearing” in tax legislation.
But in everyday terms, it describes a situation where the costs of holding an income-producing asset are greater than the income that asset brings in. In investment terms, “gearing” means using borrowed money to make an investment, so an investment becomes “negatively geared” when the income it brings in is less than the interest and other costs of holding it.
As well as property, the term can also apply to shares and other investments, but the changes announced in the 2026-27 budget are focused on residential property, and particularly the treatment of established housing compared with new builds.
Because Australia’s personal tax system generally taxes net income, a negatively geared investor has historically been able to deduct investment losses against other income, such as salary and wages.
For example:
- Someone might buy an investment property that brings in $30,000 a year in rent.
- But its costs $38,000 a year to hold the property once interest and other deductible expenses are counted.
- So that investor is $8,000 out of pocket for the year, and under the rules that have existed to date, that loss may reduce the investor's taxable income.
The same basic idea can apply outside housing too. If someone borrows to buy shares and the income from those shares is lower than the costs of holding them, that can also be a negatively geared investment.
Why would anyone want to lose money like that?
At first glance, it can sound backwards to buy an investment that loses money.
But some investors are not just looking at what an asset earns in a given year. They may be willing to wear a loss for a time if they think the asset will rise in value over the long term, or if they expect the income made from it to improve.
For example, someone might buy an investment property that costs more to hold than it brings in today, hoping rents will rise over time and the property will be worth more when they eventually sell it. The same thinking can apply to shares and other investments.
For some investors, the tax deduction also matters. If the investment makes a loss, that loss can reduce their taxable income in the meantime, which can make it easier to carry.
The proposals included in the 2026-27 federal budget would change that treatment for established housing bought after budget night, while continuing to allow investors in new builds to deduct losses from other income.
None of which necessarily means a negatively geared investment is only about tax, but it helps explain why some people are prepared to lose money on the way through if they expect to come out ahead later.
Why does capital gains tax keep coming up when people talk about negative gearing?
If an investor is prepared to lose money while holding an asset, the tax treatment of the eventual gain they make matters a lot.
From 1985 to 1999, the capital gains tax system used indexation to adjust for inflation so that only “real” gains were taxed. In 1999, the rules changed to a broad 50 per cent discount for eligible gains, and that’s the model that’s been at the centre of the modern housing tax debate.
And it’s why, in both policy and politics, negative gearing and capital gains tax tend to be discussed together.
The 2026-27 budget changes both sides of that discussion. On capital gains tax, the government said it will replace the 50 per cent CGT discount with a discount based on inflation, as well as introduce a minimum 30 per cent tax on gains from 1 July 2027. It says the CGT reforms will only apply to gains arising after 1 July 2027, and investors in new builds will be able to choose between the 50 per cent CGT discount and the new arrangements.
That new-build distinction is important. Under the budget package, new builds receive different treatment under both proposed tax changes: investors in new builds can continue to deduct losses from other income, and they will also have a choice between the existing CGT discount and the new CGT arrangements.
What’s the history of negative gearing?
The short version starts in the mid-1980s. Capital gains tax began in 1985, and negative gearing changed around the same time. In 1985 losses on rental properties bought after 17 July that year were quarantined, meaning those losses could not be used to reduce tax on other income straight away. Instead, they could be carried forward against future rental profits and capital gains. That restriction was reversed from 1 July 1987.
There was, and still is, some debate about whether the change to negative gearing pushed up rents in Sydney and Perth at the time.
What are the main arguments for and against negative gearing?
The argument for keeping the current approach usually starts with a simple tax principle. Australia’s personal tax system usually taxes net income, not gross income, so genuine costs of earning income are generally deductible. Supporters of the current settings also argue property should not be singled out if similar principles apply to other investments, and some say changing the rules could make it harder to attract rental investment in a market that already has supply problems.
The argument for changing negative gearing starts from a different point. Some argue housing is too important to be treated like any other asset class and the Senate committee examining the CGT discount said there is evidence that the combination of the CGT discount and negative gearing has pushed ownership away from owner-occupiers towards investors. An earlier Senate housing report heard evidence that these settings can favour investors over first home buyers and widen intergenerational gaps.
The budget proposal tries to draw a line between new and established housing. It keeps deductibility against other income for new builds, while limiting the treatment of losses on established housing bought after budget night, reflecting the government's stated aim of focusing tax support on new housing supply.
What should we watch for now on negative gearing?
The details will matter more than the headline. Key questions include:
- How the legislation will define a new build and established housing.
- Whether the relevant date is contract date, settlement date, completion date or another point in the transaction.
- How off-the-plan apartments, substantial renovations, knock-down rebuilds and house-and-land packages are treated.
- How carried-forward losses can be used, and whether they are linked to a particular property or a broader pool of residential property income.
- How the negative gearing changes interact with the CGT reforms, especially for investors in new builds.
- What transitional rules apply before 1 July 2027, given the budget night grandfathering date.
The key takeaways
- Negative gearing means the costs of holding an income-producing asset exceed the income it produces.
- It can apply to property, shares and other investments, but the 2026-27 budget announcement is focused on residential property.
- The budget says negative gearing will be limited to new builds from 1 July 2027.
- Properties held before budget night will keep existing arrangements under the announcement.
- Investors who buy established housing after budget night will still be able to deduct losses against residential property income and carry forward unused losses, but not deduct those losses against other income like wages.
- The negative gearing changes sit alongside proposed CGT reforms that would replace the 50 per cent discount with an inflation-based discount and a minimum 30 per cent tax on gains from 1 July 2027.
Things you should know: This article is general information only and is not tax advice. Tax rules can be complex and change over time. The budget measures described above are announced reforms and should be treated as proposed changes until legislation and official guidance confirm the final rules. Consider the ATO's guidance and independent advice from a registered tax agent if you are making decisions based on your circumstances.
