Negative gearing in 2027. What changed, what didn't, and what it means for the next purchase.

The negative gearing reform debate that dominated 2024-26 ended with substantive change to the deductibility rules. The change is more nuanced than either "negative gearing abolished" or "no change" headlines suggested. For investors planning a 2027 or 2028 purchase, the actual mechanics deserve careful examination because the deal math has shifted.

This post summarises what changed, what did not, and how the change affects typical investment decisions.

What was negative gearing

Pre-2027, the Australian negative gearing framework operated on a simple principle:

• Rental income from an investment property is taxable
• Allowable deductions (interest, property management fees, depreciation, repairs and maintenance, council rates, insurance, agent fees) reduce the taxable rental income
• If total deductions exceed rental income, the resulting loss can be deducted from other income (typically salary)
• The deduction reduces total assessable income at the investor's marginal tax rate

For a high-marginal-rate investor (45% + 2% Medicare = 47%), a $10,000 negative gearing loss produced a $4,700 tax saving. This made negatively-geared property a tax-effective investment strategy even when the underlying cash flow was loss-making.

What changed in 2026-27

The reforms, legislated mid-2026 with phased commencement, change the framework in three ways:

Change 1: deduction limit on new debt-financed property

For investment properties acquired after 1 July 2027, interest deductions are capped at a percentage of rental income (typically 90-100% of rental income, depending on property type).

Excess interest is "quarantined" and carried forward against future rental income from the same property or against capital gains on eventual sale.

Change 2: existing properties grandfathered

Investment properties acquired before 1 July 2027 are grandfathered under the pre-2027 rules. The change applies to new acquisitions only.

Change 3: depreciation rules narrowed

Depreciation on plant and equipment in second-hand residential properties was already restricted (since 2017). The 2027 reform extends some of this restriction to new construction depreciation, with reduced effective rates.

What did not change

Several aspects of the framework remain:

Capital gains tax discount

The 50% CGT discount on assets held more than 12 months remains unchanged.

Operating expense deductions

Property management fees, council rates, water charges, insurance, repairs, and maintenance remain fully deductible against rental income.

Borrowing against existing properties

The pre-2027 rules continue to apply to properties acquired pre-2027, regardless of subsequent refinancing.

Principal place of residence

Owner-occupied homes are not affected. CGT exemption on principal place of residence remains.

What this means for typical investment decisions

The reform changes the deal math for new purchases in several ways.

Effect 1: high-yield properties unaffected

For investment properties where rental income exceeds interest expense (positive cash flow), the deduction limit is irrelevant. The reform has no impact on positively-geared properties.

This includes:

• Many regional and outer-suburban houses
• Higher-yield apartments in growth corridors
• Properties with substantial recent rent growth that has caught up with debt servicing

Effect 2: high-leverage low-yield properties most affected

Properties where rental income is substantially below interest expense (such as expensive Sydney and Melbourne inner suburbs purchased at high LVR) are most affected.

Example: $1.5M Sydney apartment with $1.2M loan at 6% interest, generating $40,000/year rental:

• Interest: $72,000
• Other deductions: $15,000
• Total expenses: $87,000
• Rental income: $40,000
• Pre-2027: $47,000 loss fully deductible against salary, tax saving at 47% = $22,090
• Post-2027: only $40,000 of expenses deductible against rental, balance carried forward, $0 immediate tax saving

The pre-tax cash flow loss is the same in both scenarios. The post-tax cash flow loss is materially worse under the new rules for high-leverage low-yield investments.

Effect 3: investor compositions shifts

The reform changes who the marginal investor is for different property types:

• Inner-Sydney high-end apartment: was attractive to high-income negative gearers, now less so
• Outer-suburban house with positive cash flow: unaffected, may see relative investor demand increase
• Regional growth corridor house: unaffected, may benefit from migration of investor focus

Effect 4: properties acquired before 1 July 2027 maintain tax advantage

The grandfathering provision creates a clear distinction between pre-2027 acquisitions (treated under old rules) and post-2027 acquisitions (treated under new rules). For existing investors, the pre-2027 holdings retain their original tax treatment indefinitely.

This creates a windfall for properties acquired in the lead-up period (mid-2025 to mid-2027), which were positioned to capture the old rules.

How the reform affects strategy

For investors planning a 2027 or 2028 purchase, the strategic implications:

Strategy 1: focus on yield

In a post-2027 acquisition, yield matters more than it used to. Properties that operate at break-even or modest positive cash flow before tax are now substantially more attractive than they would have been under pre-2027 rules.

Strategy 2: lower-leverage purchases more attractive

Lower LVR reduces interest expense and brings the property closer to positive gearing. This makes the leverage cost-benefit calculation different from pre-2027.

Strategy 3: capital growth orientation more important

If rental yield is constrained by the new deduction rules, capital growth becomes a larger part of the total return. Properties with stronger capital growth prospects (location quality, scarcity, demographic tailwinds) are favoured.

Strategy 4: SMSF property considerations

SMSF property purchases are subject to the new deduction rules. The structural advantages of SMSF property (15% tax rate during accumulation, 0% during pension) remain. The interaction with the new deductibility rules requires specific advice.

Strategy 5: properties in higher-yield LGAs benefit

LGAs with traditionally higher gross rental yields - regional centres, outer-suburban Melbourne, parts of Brisbane and Perth - benefit from the reform's preference for positive cash flow properties.

What this means for sellers

The reform also affects the supply side:

• Existing investors holding negatively-geared properties may sell to release the carried-forward losses against capital gains
• Some investors may sell pre-2027 holdings to crystallise the old-rule tax benefits
• The 2027-28 sales market may include unusual volumes from the investor cohort

How to model the deal math

For any 2027+ acquisition, the deal math should include:

1. Pre-tax cash flow analysis (rental income minus all expenses)
2. Quarantined loss calculation under new rules
3. Carry-forward loss application against future income or eventual capital gain
4. Long-term holding scenario with realistic rental growth and capital growth assumptions
5. Comparison to a positively-geared alternative

The historical "negative gearing reduces my tax bill so I can afford the loss" calculation no longer applies in the same way. The reform requires investors to think about pre-tax fundamentals more carefully.

The 2027 negative gearing reforms are substantive without being radical. The pre-2027 framework is preserved for existing holdings. The post-2027 framework changes the deal math for new purchases. Reading the reform carefully and modelling its impact on your specific situation is the most useful response to the headline noise.