The negative gearing loophole few investors are talking about
The Government's negative gearing reforms may have created an unintended divide between aspiring investors and those who already own property.
Negative gearing is dead. At least that is what the government would like us to think.
The Federal Government’s negative gearing reforms were designed to discourage investment in established housing and encourage new construction. But buried within the legislation is a provision that may produce an unexpected outcome: existing property investors can continue to offset rental losses in circumstances where first-time investors cannot.
On 26 June, Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received royal assent, and therefore became law. This piece of legislation included, among other things, changes to “Limit negative gearing for residential property to new builds.”
One month on, how have these new laws been received?
Negative gearing occurs when an investment asset’s expenses exceed its income. While any investment can effectively be negatively geared, it is a term most synonymous with real estate. This is by virtue of property typically being a highly leveraged investment. The rationale for “losing money” on owing such an investment is the expectation of capital growth. That is, the investment increasing in value more than that what it cost the investor to own it.
Under Australian income tax law, there generally needs to be a “nexus” or link from an expense to its income for there to be an allowable tax deduction. Section 8.1 of the Income Tax Assessment Act 1997 (ITAA 1997), states as follows:
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
Accordingly, when an investment is acquired and the income received is taxable, the connected expenses incurred are thereby deductible - putting aside for the moment that other sections of the Tax Act may stipulate certain expenses are not in fact tax deductible or may have restrictions imposed such as depreciation that is claimed over an asset’s useful life. If there exists a loss, that loss is in essence an allowable tax deduction. That investment tax deduction can be claimed against any of the taxpayer’s other taxable income, including against salary and wages.
In an attempt to encourage home ownership, while simultaneously discouraging property investing, the government enacted new legislation to restrict negative gearing from being able to offset one’s salary and wage income.
It is important to note that these new laws do not affect an investor acquiring brand new residential property. This was a deliberate design feature to encourage and spur on the construction of new dwellings, with the end goal of increasing supply. That is, building more homes to help mitigate the effects of the housing shortage.
Section 26-155 ITAA 1997, extract below, become the newly inserted provision.
Using or holding residential dwellings:
General rule
(1) If the amounts relating to the using or holding of residential dwellings as residential accommodation that you could otherwise deduct for an income year exceed your assessable income from using or holding residential dwellings as residential accommodation for the income year, this Act applies to the amount of the excess as follows:
(a) it is not deductible for that income year;
While s26-155(1) contains further sub paragraphs, they are not relevant for this article. What is relevant is that this provision continues to permit negative gearing property losses being claimed against other residential property (dwellings) that may be owned.
In other words, if a taxpayer has a - or indeed many - positively geared residential property investments, perhaps because they have owned them for several years and have paid down, or maybe even paid out, their mortgage, they continue to be eligible to reduce their taxable income by offsetting negatively gearing residential property losses against it.
Should there be any residual negative gearing losses, then that loss is indeed not claimable within that financial year and accordingly is carried forward.
An inadvertent consequence of the changes appears to be that first-time residential property investors could find themselves worse off, at least in the short to medium term. Rather than being immediately deductible, their negative gearing losses would be carried forward to offset future rental income or the eventual capital gain, which may not be realised for many years.
Existing investors, however, would remain free to borrow, acquire additional residential investment properties, including established homes, and legally offset losses against rental profits generated by their existing portfolios.
Accordingly, it appears that the current government, perhaps in an attempt to rush the legislation through parliament, has created a set of laws that actively discourages individuals and families from being able to get a foothold in the property investment market with which to improve their longer-term financial standing. Instead, they have encouraged those that have already been fortunate to have acquired property over the years to continue to buy more.
There will, inevitably, be further knock-on effects well beyond the property market as a consequence of these new laws. Even if they will not be felt for some time. The question is, to what extent?
In the meantime, with the recent correction to property values, it will be very interesting indeed to see if property investors swoop in to pick up some bargains knowing that, to them, negative gearing is still very much alive. Only time will tell.
