Negative gearing has always turned on the loan, since the interest is usually the largest deductible cost of holding an investment property, and the May 2026 Federal Budget has now changed the rules in a way that makes the financing decision more consequential than it has been in years. As an accountant, you understand the tax mechanics better than most; the part that rewards fresh attention is how the home loan is structured and serviced, and how the new settings reshape the choice between a new build and an established property for any future purchase.
Because the loan sits at the centre of whether the strategy works, this is an area where a mortgage broker for accountants complements the modelling you already do. This article covers what the Budget changed and what it left alone, how loan structure shapes the outcome, the effect on your borrowing capacity, and the financing difference between new and established stock.
Where the Loan Sits at the Centre of Negative Gearing
You know the mechanics: when the costs of holding a property exceed its rent, the net rental loss can reduce your assessable income, and the loan interest is typically the bulk of those costs. The point worth drawing out is that the loan is the lever. Its structure determines the size of the deductible interest, the cleanliness of the deduction, and your ability to carry the shortfall, which is why the finance decisions deserve as much care as the tax ones.
What the May 2026 Budget Changed, and What It Did Not
The Budget reshaped the strategy for future purchases while protecting what investors already hold. These measures are announced and subject to legislation, so the detail may shift, but the framework is clear enough to plan around, and you will be across the finer tax points better than we are.
- Negative gearing will be limited to new builds from 1 July 2027. For established residential property purchased after 7:30pm on 12 May 2026, rental losses will only be able to be offset against residential rental income or capital gains, with any excess carried forward, rather than deducted against salary or other income.
- Properties held, or already under contract, before 7:30pm on 12 May 2026 are grandfathered and continue under the current rules until sold.
- New builds remain exempt, retaining the ability to deduct losses against other income.
- On the exit side, from 1 July 2027 the 50% capital gains tax (CGT) discount will be replaced by cost base indexation for assets held more than 12 months, with a 30% minimum tax on the net gain, for individuals, trusts and partnerships. Assets owned before Budget night keep the existing treatment, and new build owners can generally choose between regimes at sale.
The practical message for an accountant investor is that your existing position is intact, while any future purchase now carries an after-tax cashflow profile that depends heavily on whether you buy new or established. That choice flows straight into how the loan should be structured and serviced.
How Loan Structure Shapes the Outcome
The structure of the borrowing does much of the heavy lifting in a negatively geared position, both for the deduction and for your ability to sustain it. Three decisions matter most.
Interest-Only Versus Principal-and-Interest
An interest-only (IO) loan maximises the deductible portion of each repayment, because the whole payment is interest rather than a mix of interest and principal, which increases the annual loss and the associated tax saving while easing cash flow. The trade-off is that the balance does not reduce, so your equity grows only through capital appreciation, and lenders assess IO loans more conservatively, usually calculating serviceability as if the loan were principal-and-interest over the shorter remaining term once the IO period ends. That conservative assessment can quietly limit your borrowing capacity.
Keeping Deductible Debt Clean
Deductibility follows the use of the borrowed funds, so the investment borrowing belongs in its own clearly identifiable split, separate from any private debt. Holding spare cash in an offset against your non-deductible home loan preserves the deductible interest, whereas redrawing from the investment loan for a private purpose creates a mixed-purpose loan that has to be apportioned for its life. This is the contamination you would warn a client against, and it is just as easy to fall into on your own loan.
Servicing the Shortfall
Negative gearing means you fund the gap between rent and costs each year, and the lender has to be satisfied you can absorb it. Assessment runs at your actual rate plus the 3 percentage point buffer set by the Australian Prudential Regulation Authority (APRA), rental income is usually shaded to around 80%, and lenders differ in how much, if any, of the negative gearing tax benefit they recognise in serviceability. The shortfall is real money out of pocket, so the strategy needs a genuine cash buffer behind it, not just a favourable tax outcome.
How Negative Gearing Affects Your Borrowing Capacity
It is worth being clear that a negatively geared property can reduce how much you are able to borrow, not increase it, because lenders focus on your capacity to cover ongoing shortfalls rather than on the tax saving. The net rental position, the assessed repayment on any interest-only debt, and your existing commitments all feed into the calculation.
Where lenders diverge is in how they treat the tax benefit. Some add back a portion of the negative gearing benefit when assessing serviceability, which improves the result, while others ignore it entirely and assess the raw shortfall. For a self-employed accountant or firm partner, the income a lender recognises also depends on how your financials are read. Both factors make this a policy-sensitive area where matching your profile to the right lender materially changes the borrowing outcome.
Financing New Builds Versus Established Property After the Budget
Because new builds keep negative gearing while established purchases made after Budget night will not deduct losses against other income from 1 July 2027, the new-versus-established decision now has a financing dimension it did not have before. Each path carries its own loan considerations.
A new build, whether off-the-plan or a construction loan, typically involves progress payments, a valuation at completion that may differ from the contract price, and a settlement risk profile that lenders price and structure for. An established property is more straightforward to finance, but for a post-Budget-night purchase the after-tax cashflow shifts once the negative gearing change takes effect, which changes how much shortfall you are comfortable carrying and therefore how the loan should be sized and structured. None of this makes one option universally better; it means the finance and the tax position now have to be considered together for any new acquisition, while your grandfathered holdings carry on unchanged.
Managing the Risks
The tax benefit reduces a loss; it does not remove it, so the strategy only works if the underlying investment performs and you can sustain the holding. A few risks deserve a deliberate stress test before you commit.
- Rate rises widen the gap between rent and costs, so test the numbers at a rate 2 to 3 percentage points above your current one to see whether the position still holds.
- Vacancy means you cover every outgoing with no offsetting rent, so allow for periods without a tenant rather than assuming full occupancy.
- Buying for the deduction alone is the classic trap; the property has to stack up on cash flow, location, and demand before the tax position is even relevant.
Frequently Asked Questions (FAQs)
Does negative gearing still exist after the 2026 Budget?
Yes, but in a narrower form for future purchases. From 1 July 2027 it will be limited to new builds, and for established residential property bought after 7:30pm on 12 May 2026, rental losses will only offset residential rental income or capital gains rather than other income. The measures are announced and subject to legislation, so the detail may still be refined.
Is my existing negatively geared property affected?
No. Properties held, or under contract, before 7:30pm on 12 May 2026 are grandfathered and continue under the current rules until you sell. There is no need to restructure an existing holding because of the change, though it is worth factoring into any decision to sell or buy more.
Does an interest-only loan increase my negative gearing benefit?
It maximises the deductible interest, because the entire repayment is interest, which increases the annual loss and the tax saving while helping cash flow. The cost is that the balance does not reduce and lenders assess interest-only debt more conservatively, so the larger deduction comes with slower equity build and a tighter serviceability assessment.
Does negative gearing reduce how much I can borrow?
It can. Lenders assess your ability to carry the rental shortfall and the loan repayments, so a larger shortfall tends to reduce capacity. How much the negative gearing tax benefit helps depends on the lender, since some recognise part of it in serviceability and others do not, which is why lender choice matters here.
Should my offset sit against my investment loan?
Generally not. Holding the offset against your non-deductible home loan reduces interest you cannot claim while preserving the deductible interest on the investment loan. Offsetting the investment loan instead quietly lowers the deduction you are otherwise entitled to.
Why does the new-versus-established choice matter more now?
Because new builds retain negative gearing while established properties bought after Budget night will not deduct losses against other income from 1 July 2027. That difference changes the after-tax cashflow of a future purchase, which in turn affects how the loan should be structured, sized, and serviced. Your own modelling will show the comparison for your circumstances.
The Bottom Line
Negative gearing remains a legitimate strategy, but the May 2026 Budget has narrowed it to new builds for future established purchases and reshaped the capital gains position at the other end, which makes the financing decision more consequential rather than less. You own the tax modelling; the leverage sits in the loan, in the choice between interest-only and principal-and-interest, in keeping the deductible debt clean, in servicing the shortfall under the assessment buffer, and in the financing difference between new and established stock. Your existing holdings are grandfathered and need no change. For anything new, run your numbers and pair that modelling with a broker who can structure and service the finance to match.