Negative Gearing Changes: The 12 May 2026 Cut-Off and Your 2027 Transition Plan

Published: 29 August 2026

Last updated 29 August 2026 · Legislation status: Treasury Laws Amendment (Tax Reform No. 1) Act 2026 enacted (Royal Assent 26 June 2026); implementation detail continuing through later tranches.

Source: Treasury Laws Amendment (Tax Reform No. 1) Act 2026; ATO reform guidance current to August 2026.

You own an investment property — or you're weighing a purchase — and you know the negative gearing rules are changing. Two questions matter: does the change apply to you, and what should you do in the ten months before it starts? The law passed Parliament in June 2026, the dividing line was drawn on Budget night, and every established-dwelling purchase since then already sits on the new-regime side of it. This guide covers who is grandfathered, how loss quarantining works mechanically, the CGT method change that travels with it, and a transition plan by investor type for the window to 1 July 2027.

This is general information, not personal tax, financial or credit advice. The legislation is new, some administrative detail is still being settled, and the right move depends on your income, structure and portfolio. Confirm your position with a registered tax agent or licensed adviser before acting. Figures are current to late August 2026.

What the Law Actually Says

Fifteen months of proposals, modelling and amendment fights compressed into one statute. Being precise about what it does — and doesn't — do is the foundation of every decision below.

Change one: negative gearing quarantining. From 1 July 2027, a net rental loss from an established residential dwelling last acquired after 7:30pm AEST on 12 May 2026 stops being deductible against wages, business or investment income. The quarantining regime (Schedule 2 to the Act) applies to individuals, companies and most trusts — the statutory carve-outs are for widely held unit trusts and complying superannuation entities. The loss isn't denied — it's quarantined: under the Act's method statement it can offset assessable income from quarantined dwellings, net income from non-quarantined dwellings, and revenue or capital gains on residential dwellings, with unused amounts carried forward. The acquisition test turns on when the ownership interest was last acquired — under a contract, generally the day the contract is entered into, not settlement — so a June 2026 exchange with a September 2026 settlement is on the new-regime side of the line. (Options, assignments, novations and varied contracts can complicate the timing test; take advice on unusual structures.)

Change two: the CGT method. For resident individuals, trusts and relevant partnership interests, the 50% CGT discount is replaced by CPI indexation of the cost base, with a minimum-tax test under which the tax on a net capital gain cannot fall below 30% of that gain. The transition runs through a deemed disposal: affected assets are treated as disposed of and reacquired at market value on 1 July 2027, and the resulting gain is a deferred CGT event — nothing falls due on 1 July 2027; the pre-2027 component is taxed under the current 50%-discount rules when the asset is eventually sold, and only later growth runs through the new method. Eligible new residential dwellings and affordable housing sit outside the deemed-disposal mechanism under their own rules: new-dwelling owners can choose between the old discount and the new method, while eligible affordable housing keeps its existing concessional treatment (a discount of up to 60%). Companies (which never had the discount), complying super funds (which keep their 33⅓% discount), life insurers, and foreign and temporary residents are outside the new method. One measure not to confuse with this: the separately announced 30% minimum tax on discretionary trusts is a different reform, proposed to start 1 July 2028, and is not yet law.

Change three: the SMSF borrowing ban. A late Labor–Greens amendment to the same Act ended new limited recourse borrowing arrangements over residential property. It commenced on 10 August 2026 and is now in force — we covered the mechanics and the grandfathering of existing loans in our LRBA ban deadline guide.

Two points routinely get lost in the coverage. First, nothing about negative gearing changes in 2026–27: every investor, on both sides of the cut-off, deducts rental losses under the current rules until 30 June 2027. Second, the negative gearing cut-off and the CGT change have different scopes: the 12 May 2026 line governs gearing only, while the CGT method change reaches individual-, trust- and partnership-held property broadly, softened by the deemed-disposal transition. Conflating the two leads to errors in both directions.

Who Is Grandfathered Under the 12 May 2026 Negative Gearing Cut-Off?

Walk your portfolio through this, one property at a time:

Last acquired before 7:30pm AEST, 12 May 2026 (any residential property). Fully grandfathered. Losses stay deductible against salary and other income indefinitely — the enacted Act sets no time limit, no phase-out, and no cap on the number of grandfathered dwellings per taxpayer. Early Budget-week commentary floated a per-investor dwelling cap; it did not survive into the legislation. A ten-property portfolio assembled before Budget night keeps unlimited gearing on all ten.

Acquired after the cut-off — eligible new dwelling. Outside the quarantining rules, subject to definition. The Act exempts net rental losses on eligible new residential dwellings (and eligible affordable housing) — a deliberate incentive toward supply-adding investment — and these owners also get the choice between CGT methods. Two qualifications matter: the requirements for what counts as a “new residential dwelling” are left to a Ministerial legislative instrument that has not yet been made, and a newly constructed property is not automatically one that adds to housing supply under the rules. Don't assume an edge case (substantially renovated, off-the-plan resale, replacement dwelling) qualifies until the instrument lands. We modelled how far the carve-out shifts the new-versus-established comparison in our post-Budget carve-out analysis.

Acquired after the cut-off — established dwelling. Caught. Full gearing continues only until 30 June 2027; from 1 July 2027 the losses are quarantined. Every established purchase since Budget night — including anything you buy this spring — is in this category, and should be modelled on quarantined-loss cash flows from day one.

Held through a company. Inside the quarantining. Schedule 2 applies to individuals, companies and most trusts alike, so from 1 July 2027 a company's losses on post-cut-off established dwellings are quarantined to residential-property income under the same method statement — layered on the company's ordinary tax-loss rules. Companies sit outside the new CGT method only because they never received the 50% discount in the first place. The reform does not create a company advantage — see the structures section below.

Held through a complying super fund. Exempt from the quarantining (a statutory carve-out, alongside widely held unit trusts), and the fund keeps its 33⅓% CGT discount. The reform left SMSFs' tax treatment alone while the same Act removed their ability to borrow for residential property — two changes with combined strategic consequences we cover in the SMSF section below.

Three edge cases worth knowing. A straightforward refinance does not itself change a property's status — grandfathering attaches to the ownership interest in the dwelling, not the loan — but transfers or changes of ownership (into a trust, between spouses, partial-interest changes) are different events entirely and should be reviewed separately before acting. Off-the-plan buyers should date their position from when the contract was entered into; a pre-cut-off off-the-plan contract settling in 2027 is on the protected side (and may separately qualify as a new dwelling). Inherited property and relationship-breakdown transfers are being addressed in the next tranche: Treasury's Tax Reform No. 3 exposure draft (consultation closed 21 August 2026) proposes preservation rules for these situations, but they are not yet law — don't lock in a plan that depends on the final detail.

The buyer's map in one table:

Source: Treasury Laws Amendment (Tax Reform No. 1) Act 2026, Schedules 1–2; definition instrument pending.

What Happens to Negative Gearing on an Established Property Bought After 12 May 2026?

“Quarantined” is doing precise work in this legislation, and it is worth walking through what actually happens to a loss — because the reform changes the timing and destination of the deduction more than it destroys it.

Worked example one: the single post-cut-off property. An investor on a 39% marginal rate (37% plus Medicare levy) buys an established unit in October 2026 — $640,000, with a $512,000 interest-only loan at 6.4%. The components, separated so the arithmetic is checkable: gross rent at $560 a week = $29,120; interest = $32,770; deductible operating costs (rates, insurance, management, maintenance) = $7,500; capital-works deduction (non-cash) = $3,000. Taxable rental loss: $29,120 − $32,770 − $7,500 − $3,000 = −$14,150 (~$14,000). Cash shortfall before tax — which excludes the non-cash capital works — is $29,120 − $32,770 − $7,500 = −$11,150, or about $214 a week.

• FY2026–27 (current rules): the $14,000 loss deducts against salary — an illustrative tax effect of roughly $5,460, assuming the full deduction lands at a 39% marginal rate (37% plus the 2% Medicare levy; taxable income above $135,000). Out-of-pocket cash cost after that benefit: about $109 a week.
• FY2027–28 (quarantined): the same $14,000 loss can no longer touch salary. With no other residential income, it carries forward in full. Out-of-pocket cash cost: about $214 a week — a $105-a-week cash-flow deterioration with no change in the property, the rent or the rate.

That $105 a week is what the reform means in practice. The loss isn't gone — it's parked (see example three) — but the annual cash refund that many geared strategies quietly depend on stops arriving.

Worked example two: the mixed portfolio. The same investor also owns a grandfathered 2019 property that has matured into a $6,000 net rental profit. From 1 July 2027, the quarantined $14,000 loss first offsets that $6,000 of residential rental income — the Act's method statement allows quarantined amounts to offset net income from non-quarantined dwellings, not just the loss-making property's own income — leaving $8,000 to carry forward. The practical effect: the $6,000 profit that would have been taxed at 39% is absorbed, clawing back about $2,340 of the lost benefit. Portfolio investors with positively geared stock retain much more of negative gearing's value than single-property investors.

Worked example three: the exit. Years later, the investor sells the post-cut-off unit with $30,000 of accumulated quarantined losses and a capital gain. The carried-forward losses reduce the gain in the CGT calculation. We won't put a dollar figure on that recovery — its value depends on ordering rules against the transition components that are still being finalised — but the reliable point is timing: whatever the benefit is worth, it arrives once, at sale, years later, instead of as annual cash flow along the way. The reform's real cost is time value and serviceability, not the headline deduction.

Quarantining transforms negative gearing from a cash-flow subsidy into a deferred tax asset. The investor who could comfortably fund the full holding cost was never relying on the refund; the investor stretched to their serviceability ceiling was. The change lands hardest where leverage is most aggressive — and that is the lens lenders can be expected to apply. Note that lender serviceability models already ignore negative gearing benefits in most cases, so your borrowing capacity doesn't change — your lived cash flow does. Model any post-cut-off established purchase on quarantined numbers from the start, using our borrowing capacity guide for the lender-side view.

The CGT Half: Indexation, the 30% Floor, and the Deemed Disposal

The negative gearing change gets the headlines; the CGT method change may move more money. Under the new method, instead of halving your gain, you index your cost base by CPI and pay tax on the real (inflation-adjusted) gain at your marginal rate — subject to a minimum-tax test under which the tax on the net capital gain cannot fall below 30% of that gain.

How the transition protects you. The Act deems affected assets disposed of and reacquired at market value on 1 July 2027 (eligible new dwellings and affordable housing are excluded, under their own rules). The deemed gain is a deferred CGT event — no tax falls due on 1 July 2027. Growth from your original purchase to that date is taxed under the current 50%-discount rules when you eventually sell; only growth after 1 July 2027 runs through the new method. Nobody's accrued gains are retrospectively re-taxed — a design choice that removes the panic-selling incentive a cruder transition would have created.

Worked example — how the methods compare. A property is worth $800,000 at the deemed reacquisition and sells for $950,000 five years later: a $150,000 post-2027 gain, for a 45%-bracket investor.

Method, step by step: index the cost base by CPI over the holding period → deduct it from proceeds to get the real gain → apply your marginal rate, then test against the minimum (tax on the net capital gain cannot fall below 30% of the gain — not binding for the 45% taxpayer shown, binding for lower brackets). Illustrative only — outcomes depend on your overall tax position. Source: our modelling on the enacted method.

The pattern generalises: indexation rewards long, high-inflation holds and punishes short, low-inflation flips — a structural push toward exactly the long-hold behaviour most property investors already claim to practise. For middle-bracket investors the 30% floor adds a wrinkle: a gain that would have been taxed below 30% after the discount can't be under the new method. And for new-dwelling owners, the choice between methods becomes a genuine sell-year decision worth modelling both ways. The full mechanics, including how this interacts with depreciation clawback, are in our CGT guide.

The deemed disposal creates one near-universal action item: valuation evidence. Your tax outcome on any post-2027 sale now hinges on the asset's market value at 1 July 2027. The ATO has not yet said what evidence standard it will require or whether it will publish safe harbours — this is the most consequential piece of pending guidance in the reform. Our view: commission or at least document a credible valuation (full valuation for high-value or unusual assets; a documented appraisal plus comparable sales file at minimum) as close to 30 June 2027 as practical. A defensible number set contemporaneously beats a retrospective argument with the Commissioner in 2032.

What is still being finalised, and where each item stands:

Source: Treasury consultation hub and ministerial media releases, August 2026. None of it changes the architecture above; all of it can change the decimal points.

Your Transition Plan, by Investor Type

The grandfathered holder

You hold the reform's most valuable and least appreciated asset: grandfathered status you cannot buy back. Once you sell a pre-cut-off property, any replacement is a new-regime asset; the unlimited-gearing treatment dies with the disposal. Three consequences follow. First, the bar for selling a grandfathered, negatively geared property just rose — the after-tax return you'd need from redeploying the equity must now clear the value of the gearing treatment you'd be extinguishing. Second, if you were ever going to rationalise the portfolio, model the disposal order deliberately: all else equal, grandfathered gearing is the feature you cannot replace — but yield, growth prospects, debt position, transaction costs and each asset's CGT exposure can all outweigh it, so treat “sell the non-grandfathered assets first” as a scenario to test, not a rule. Third, grandfathering protects your gearing, not your CGT method — the deemed disposal applies to you too, so the valuation-evidence point above is on your list regardless. Your only genuine deadline is the same one every individual investor has: gains realised through 30 June 2027 use the current 50% discount by right — a sequencing question you can pressure-test today in our CGT sell-vs-hold calculator and that we'll treat properly in a dedicated sell-versus-hold analysis. One further nuance for very long holds: under the transition's deemed sale-and-reacquisition framework, a pre-1985 (pre-CGT) asset ceases to be pre-CGT from 1 July 2027 — the historical gain to that date is disregarded, not taxed, but growth after that date becomes taxable under the new method. Flag it with your adviser. And on any sale, remember the friction costs the tax debate ignores: agent and legal fees, any duty on a replacement asset, loan break costs and the time out of the market all belong in the same model as the CGT.

The post-cut-off owner (bought established since Budget night)

You have ten months of full gearing left, and the job is arithmetic. Compute the worked-example-one number for your property: the annual after-tax cash-flow change when the salary offset stops. Then fund it. The levers, in rough order of value: a rent review against a market where advertised rents grew ~5.9% over the year to July (Cotality; our rental yield calculator benchmarks your suburb); a rate renegotiation or refinance — ask your lender or broker whether a repricing or refinance can reduce your current margin (the refinance playbook); a depreciation schedule refresh (capital-works deductions survive quarantining as part of the rental calculation — they reduce the loss, they aren't lost); and building the offset buffer while the refund still arrives. If the number doesn't fund, 2026–27 — with the 50% CGT discount still in place — is a far better exit year than 2027–28.

The investor deciding whether to buy now

The reform reframes but doesn't settle the buy question. In favour of acting: a genuine buyer's market — four straight months of national price falls to July 2026 on PropTrack's index (Cotality's shows the same), materially weaker investor competition after the June quarter's investor-lending contraction (−8.6% by number of commitments, −10.2% by value — ABS), and expanding gross yields. Against: any established purchase now carries quarantined gearing from July 2027, and the rate outlook has hardened — after July's CPI, three of the four major banks forecast a hike to 4.60% (as at 28 August 2026), so model at that rate, not 4.35%. The comparison that matters is established at a negotiated discount versus new with the carve-out at a developer premium, both modelled on post-July-2027 rules. Our carve-out modelling runs the numbers; the short version is that a sufficient purchase discount on established stock can outweigh the lost salary offset, but only if the property is positively gearable within a few years — which pushes the answer toward higher-yield stock and away from deeply negatively geared, low-yield assets. One caveat on the “new” side: the legal definition of a new residential dwelling sits in a ministerial instrument that hasn't yet been made, so don't bank the carve-out on an edge-case property (substantially renovated, off-the-plan resale) until it lands.

The high-income investor

Your marginal rate made negative gearing most valuable to you, so the quarantining costs you most per dollar of loss — and your gains make the CGT transition your bigger lever. Two sequencing windows are open. Gains you realise through 30 June 2027 use the current 50% discount as of right — if a sale was coming anyway in the next couple of years, the maths of bringing it into 2026–27 deserves a proper model — our CGT sell-vs-hold calculator is the starting point — especially paired with a deductible super contribution inside the $32,500 concessional cap (and any carry-forward space) to blunt the tax. And losses you're still deducting against salary this year are the last of their kind for any post-cut-off established holdings. What the windows do not justify is transacting for tax reasons alone: the deemed disposal already protects your accrued gains, so there is no forced-sale logic in this reform — only optional sequencing. That sell-before-2027 decision is consequential enough that we're giving it a standalone analysis.

The trust- and company-structured investor

Trusts are inside both changes — quarantining and the new CGT method (widely held unit trusts are carved out of quarantining) — so trust-held established purchases post-cut-off face the same arithmetic as individuals, with distribution flexibility as the remaining advantage. Discretionary trusts also face a separate, announced measure: a 30% minimum tax on trust net income proposed from 1 July 2028, not yet legislated, with a time-limited restructure rollover proposed alongside it — factor it into any new trust structure now. Companies are inside the quarantining too, and sit outside the new CGT method only because they never had the discount; corporate holding keeps its old problems (no discount, Div 7A friction, duty and CGT to restructure out). No structure emerges from this reform with a clean advantage. If you're establishing a structure for a 2026–27 purchase, model it on 2027–28 rules — the after-tax rankings of individual, trust, company and super holding have genuinely shifted, and unwinding a wrong structure costs multiples of the advice that would have prevented it. Our trust-versus-personal-name guide covers the pre-reform framework; treat its tax comparisons as superseded pending its scheduled update.

The SMSF trustee

The reform treats super two ways: complying funds are exempt from quarantining and keep the 33⅓% CGT discount — comparatively, the fund became a more attractive place to hold residential property — while the same Act removed the ability to borrow for it (in force since 10 August 2026). Existing residential LRBAs continue unaffected, and the ATO's transitional guidance (July 2026) confirms refinancing an existing arrangement remains permitted — the ban is on entering new arrangements, which must now be over business real property. So the SMSF route now suits cash-rich funds buying without leverage, and business owners using business real property strategies. If your balance is near $3 million, Division 296 modelling (realised-earnings basis, first measured 30 June 2027) belongs in the same conversation — see our SMSF property services overview.

The Countdown: Key Dates to 1 July 2027

Source: Treasury Laws Amendment (Tax Reform No. 1) Act 2026 commencement provisions; ATO reform pages, August 2026.

Where the Debate Stands — and Our Read

The Government's position is that quarantining plus the new-build carve-out redirects, rather than removes, investor incentives — pointing capital at supply-adding stock while grandfathering protects everyone who bought under the old rules. Industry and housing-body critiques — including the HIA modelling we analysed in March — argue the carve-out won't fully replace lost established-stock investment, tightening a rental market where national vacancy sits at 1.3% (SQM Research, July 2026). Early post-Budget data gives both sides ammunition: the June quarter's investor-lending fall — 8.6% fewer commitments by number, 10.2% by value (ABS Lending Indicators, June quarter 2026) — shows the demand shock is real; whether the new-dwelling share of that lending rises across 2027 is the number that will settle the argument.

Historical context sharpens the debate on both sides. Australia quarantined rental interest deductions once before — from July 1985 — and reversed the change in September 1987, amid a still-unresolved argument over whether it caused the rent spikes recorded in Sydney and Perth (rents in most other capitals stayed comparatively flat, which is why both sides cite the same episode). The practical lesson from 1985–87 is less about rents than about permanence: a gearing regime changed twice within 26 months. And the CGT half is a return, not an experiment — Australia taxed real (CPI-indexed) gains from CGT's introduction in September 1985 until the 1999 Ralph Review introduced the 50% discount. That fourteen-year run is why the comparison table above behaves as it does: indexation treated the high-inflation late 1980s comparatively well and the low-inflation 1990s comparatively poorly — so a post-2027 hold should be modelled under both inflation scenarios rather than assuming either decade repeats.

Our analysis: for an individual investor, the enacted law — not the original policy proposal — is now the basis for planning: the cut-off has passed and the transition dates are fixed. The policy debate still matters for what comes next (future amendments, rents, prices), but it no longer changes what you should do before 1 July 2027. What is decision-relevant: the reform favours portfolio investors over single-property ones (quarantined losses find income to offset), long holds over flips (indexation), higher-yield stock over deeply geared trophies (cash-flow self-sufficiency), and grandfathered assets over everything (never replaceable). Position for those tilts, and leave the policy argument to the commentators.

Your Transition Checklist

Work through these with your adviser before 30 June 2027 — the earlier items this financial year, the valuation items near the end of it:

1. Date every contract. Record each property's contract date against 7:30pm, 12 May 2026 — your documented grandfathering map.
2. Compute your quarantining number. For each post-cut-off established holding: the annual after-tax cash-flow change when the salary offset stops. Fund it or fix it.
3. Review rents against the market. Advertised rents grew ~5.9% over the year to July (Cotality) with vacancy at 1.3% (SQM) — closing the gap on your own stock is the cleanest offset to the lost refund.
4. Ask about the debt. Have your lender or broker check whether a repricing or refinance can reduce your current margin; at current balances that can cover a meaningful share of the quarantining cost.
5. Refresh depreciation schedules. Capital-works deductions keep working inside the rental calculation after quarantining — make sure you're claiming everything.
6. Sequence any planned sales. Exits already intended within a few years should be modelled for the 2026–27 window while the 50% discount applies as of right — including selling costs, duty on any replacement, and forgone growth.
7. Plan valuation evidence for 30 June 2027. Contemporaneous appraisals or valuations on every individual- and trust-held property — the deemed-disposal number underpins every future CGT calculation.
8. Re-run structure choices on 2027–28 rules. Any new purchase's holding structure — individual, trust, company, SMSF — should be modelled on post-reform tax treatment (including the proposed 2028 discretionary-trust minimum tax), not the rules that expire in ten months.

The Bottom Line

The negative gearing reform is enacted, dated and narrower than commonly reported: it quarantines — rather than abolishes — losses on established dwellings bought after 12 May 2026, leaves every earlier purchase untouched with no cap or expiry, and keeps eligible new dwellings outside the rules. The CGT method change travelling with it is softened by transition rules that preserve the current 50%-discount treatment for growth to 30 June 2027, with tax deferred until sale. That leaves ten months of genuine planning window: grandfathered holders protecting a status they can never repurchase, post-cut-off owners funding a known cash-flow change before it arrives, sellers sequencing gains against the discount's final year, and every buyer modelling established-versus-new on the rules that will actually govern their holding. The investors who do the arithmetic this year will be prepared well before 1 July 2027; the ones who wait will meet the change in their 2028 tax return, after the planning window has closed.