Positive Gearing vs Negative Gearing After the 2026 Budget
The 2026 Budget changes the economics of negative gearing for future purchases of established residential property by restricting the immediate use of rental losses. Positive gearing may attract greater attention as investors focus on rental income, cash flow, and yield, while negative gearing remains available for eligible new residential builds.
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Introduction
For years, negative gearing has been one of the most influential factors in Australian property investment. Investors often accepted short-term cash flow losses because the tax system allowed those losses to reduce tax on salary and other income.
The 2026 Federal Budget proposes changes that could alter that calculation for future property purchases. While negative gearing is not being abolished, access to its most valuable tax benefits will become far more limited for investors buying established residential property.
As a result, the debate between positive gearing and negative gearing may become less about tax deductions and more about cash flow, rental yield, and long-term investment outcomes.
What Is Negative Gearing?
A property is negatively geared when its deductible expenses exceed its rental income.
For example, an investor may receive $35,000 in annual rent while incurring:
$28,000 in loan interest
$5,000 in property expenses
$4,000 in depreciation and other deductions
In this scenario, the property produces a taxable loss.
Under the current rules, that loss can generally be deducted against other income, such as salary, reducing the investor's overall tax bill.
Historically, this tax benefit has made negatively geared property attractive to investors expecting strong long-term capital growth.
What Is Positive Gearing?
A property is positively geared when rental income exceeds deductible expenses.
For example, an investor may receive $45,000 in rent while incurring:
$20,000 in loan interest
$7,000 in property expenses
The property generates a surplus before tax.
Unlike negatively geared investments, positively geared properties provide immediate cash flow. The investor receives income rather than contributing additional funds to support the property. The trade-off is that the surplus is taxable.
Why Negative Gearing Has Been Popular
The traditional negative gearing model relied on two assumptions.
First, rental losses could be used to reduce tax on salary and wages.
Second, future capital growth would compensate for the cash flow losses incurred during ownership.
For investors with higher incomes, the annual tax refund helped offset part of the property's holding costs. This allowed investors to tolerate lower rental yields while waiting for capital growth.
The combination of negative gearing and the 50% CGT discount created a powerful incentive to invest in established residential property.
What Changed After 1 July 2027?
The proposed reforms create a different outcome for investors purchasing established residential property after 12 May 2026.
From 1 July 2027, rental losses on these properties will be quarantined. This means those losses can no longer be used to reduce tax on:
Salary and wages
Business income
Investment income unrelated to residential property
Instead, the losses can only be applied against:
Future residential rental income
Future residential property capital gains
The losses still retain value, but the timing and use of the deduction changes.
How the Changes Affect Negative Gearing
The reforms do not eliminate negative gearing entirely. They remove the immediate tax benefit that has traditionally made negative gearing attractive for established residential property.
Under the proposed rules, an investor who incurs a $15,000 rental loss cannot use that loss to reduce tax on employment income. Instead, the loss is carried forward until future property income or capital gains become available.
This changes the economics of highly leveraged property investment. Investors will need sufficient cash flow to fund losses without relying on annual tax refunds to support the strategy.
Why Positive Gearing May Become More Attractive
The proposed reforms place greater emphasis on the underlying performance of the property.
When rental losses can no longer reduce salary income, investors may focus more heavily on:
Rental yield
Occupancy rates
Cash flow
Debt levels
Interest costs
A positively geared property generates income immediately and does not depend on tax deductions to improve annual cash flow.
For investors seeking income, particularly those approaching retirement or building a passive income stream, positive gearing may receive greater attention than it has in previous years.
The Budget's policy direction encourages investors to assess whether a property stands on its own financial merits rather than relying on tax concessions to improve returns.
Are New Builds Different?
Yes. The Government intends to preserve traditional negative gearing for eligible new residential builds.
Investors in qualifying new properties can continue to deduct rental losses against:
Salary and wages
Business income
Other assessable income
This creates a clear distinction between new builds and established residential properties.
For investors who wish to continue using negative gearing as part of their strategy, new residential construction becomes the primary avenue for retaining those benefits.
Does This Mean Negative Gearing Is No Longer Useful?
Not necessarily. Rental losses on established residential property are still recognised under the tax system. They are simply deferred.
An investor who accumulates losses during the early years of ownership may later use those losses to offset:
Future rental profits
Future capital gains from residential property
The value of the deduction remains available.
What changes is the timing of when that value can be accessed.
The Natural Transition from Negative to Positive Gearing
Property investments evolve over time. Loan balances may decline, rents may increase, and rental income may eventually exceed expenses.
Budget papers indicate that more than half of negatively geared properties typically become positively geared within four to five years, while more than three-quarters become positively geared within ten years.
Under the proposed framework, investors purchasing established residential property may effectively accumulate losses during the early years and then use those losses when the property generates taxable income later in its life cycle.
This creates a different pathway to profitability than the traditional negative gearing model.
What About Existing Property Owners?
The proposed changes do not apply to every property. Residential properties owned, or under contract, before 7:30 pm (AEST) on 12 May 2026 are grandfathered.
Owners of these properties can continue using existing negative gearing arrangements for as long as they hold the asset. This means current investors retain the ability to deduct rental losses against salary and other income.
The reforms are directed at future purchases rather than existing holdings.
Which Strategy Is Better After the Budget?
There is no universal answer. The better approach depends on:
Income levels
Cash flow requirements
Debt levels
Risk tolerance
Investment objectives
Property selection
For investors purchasing established residential property after the reforms commence, positive gearing becomes more attractive because immediate tax offsets are no longer available.
For investors purchasing eligible new builds, traditional negative gearing remains available and may continue to form part of a broader investment strategy.
The proposed reforms do not end the debate between positive gearing and negative gearing. They change the incentives that underpin that debate. From July 2027, investors may spend less time focusing on tax refunds and more time assessing rental income, cash flow, and the property's ability to generate sustainable long-term returns.
If you would like to understand how the proposed negative gearing reforms could affect your property strategy, cash flow, or long-term wealth plan, book a free 15-minute call with James Hayes for personalised financial planning advice.
Disclaimer
The information in this article is provided as a general guide only. It does not constitute personal financial advice and should not be relied upon as such. Readers should seek advice from a licensed financial adviser before making any financial decisions. James Hayes and his associated entities accept no responsibility or liability for any loss, damage, or action taken in reliance on the information contained in this article. Links to third-party websites are provided for reference purposes only. We do not endorse or guarantee the accuracy of their content.