Proven tips to use negative gearing before the rules change

The negative gearing rules for residential investment property will change from 1 July 2027.

Under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received Royal Assent on 26 June 2026, net rental losses on most residential properties acquired from 7:30pm AEST on 12 May 2026 can only be offset against other residential rental income, not your salary or wages. Properties you already own, or had under contract at that date, remain unaffected. Eligible new builds retain full negative gearing benefits.

For public sector employees in Tasmania with stable employment and borrowing power, this creates a clear decision point around timing, property selection, and whether to act before mid-2027 or wait and focus on new construction.

How negative gearing currently works for property investors

Negative gearing allows you to offset the loss from an investment property against your other taxable income. If your annual interest, body corporate fees, insurance, and maintenance exceed the rent you collect, that loss reduces the tax you pay on your salary.

Consider a scenario where you earn $95,000 as a government policy officer and buy an established unit. The property generates $22,000 in annual rent but costs $28,000 to hold once you account for loan interest, strata fees, rates, and insurance. The $6,000 loss reduces your taxable income to $89,000, lowering your tax bill by around $2,000 at current marginal rates. You wear the cash shortfall each year but rely on long-term capital growth to make the investment worthwhile.

From 1 July 2027, if that same unit were purchased after 12 May 2026 and is not an eligible new build, the $6,000 loss can only be carried forward or offset against future rental income or capital gains from residential property. It cannot reduce the tax on your government salary. This removes the immediate tax relief that has made holding negatively geared property more affordable for salary earners in the public service.

Grandfathering protects properties you already own

Any residential property you held at 7:30pm AEST on 12 May 2026, or had under contract at that time, continues under the existing rules. You can keep negatively gearing those properties against your employment income until you sell.

If you acquired a property between that cut-off and 30 June 2027, you can negatively gear it under the old rules until 30 June 2027 only. After that date, losses are quarantined. This transitional period gives a short window to claim losses against salary, but the benefit ends quickly.

For anyone buying your first investment property, the question becomes whether to aim for settlement before mid-2027 on an established dwelling and accept limited negative gearing from that point, or to wait and focus on properties that qualify as eligible new builds.

Eligible new builds retain full negative gearing benefits

Under the new rules, eligible new residential dwellings continue to allow negative gearing against all income, including wages.

An eligible new build is a dwelling constructed on previously vacant land, or a development that increases the total number of dwellings on a site. A knock-down rebuild that replaces one house with one house does not qualify. A substantial renovation also does not qualify. If a new build is occupied for more than 12 months before it is sold to you as an investor, it loses eligibility.

In Hobart and Launceston, new apartment developments and townhouse subdivisions typically meet the definition. A brand-new two-bedroom unit in a small infill development off Argyle Street in Hobart, for instance, would qualify if you are the first owner and the block previously held fewer dwellings. The same dwelling, if sold to you five years later, would not.

New builds often carry a price premium and lower initial rental yields compared with established stock. In our experience, buyers attracted to the ongoing tax benefit need to weigh that against the higher entry cost and potentially slower early-stage capital growth, particularly in precincts where supply is concentrated.

How the debt-to-income cap interacts with investment borrowing

From 1 February 2026, lenders are limited in how many new investment loans they can write at a debt-to-income ratio of six times or more. The cap applies separately to investor and owner-occupier lending, and sits at 20 per cent of each portfolio for most banks.

For Tasmanian Government employees with gross household income around $140,000, a debt-to-income ratio of six equates to total borrowing of $840,000 across all loans, including any existing owner-occupied mortgage. If you already carry $600,000 on your home, an investment loan that pushes total debt above $840,000 will count against the cap.

Lenders manage their quarterly allocation carefully. If you apply late in a quarter and the bank has already used most of its allocation, your application may be declined or deferred even if you meet all other criteria. Lodging early in the quarter, or working with a broker who tracks lender capacity, improves your chances when borrowing near or above the threshold.

What counts as an investment loan for serviceability and rate pricing

Lenders classify a loan as investment or owner-occupied based on your intended use of the property, not the security type. The classification affects the interest rate you pay, the serviceability buffer applied, and how the loan is counted under the debt-to-income cap.

Investor rates sit around 0.4 to 0.6 percentage points higher than equivalent owner-occupier rates at most lenders. Serviceability is assessed using a three percentage point buffer above the product rate, rental income is shaded by 20 per cent to account for vacancy and maintenance, and the loan counts toward the investor portfolio cap.

If you apply for interest only loans on an investment property, the rate is typically higher again and the interest-only period is capped at five years. After that, the loan reverts to principal and interest unless you reapply and meet serviceability at that time. Rental income and stable public sector employment help, but the revert rate and repayment increase need to be factored into your long-term holding costs.

Claimable expenses and how the loss is calculated

The rental loss that can be offset, or quarantined under the new rules, is the difference between your assessable rental income and your allowable deductions.

Deductible costs include loan interest, council and water rates, strata or body corporate fees, landlord insurance, property management fees, repairs and maintenance that are not capital improvements, and depreciation on the building and fixtures where applicable. Loan principal repayments are not deductible. Stamp duty and conveyancing costs are added to your cost base for capital gains tax purposes, not claimed as an annual deduction.

In a typical scenario, a two-bedroom apartment in Sandy Bay generating $28,000 in annual rent might incur $18,000 in interest, $4,000 in body corporate fees, $2,500 in rates and insurance, $2,000 in management fees, and $1,500 in depreciation. Total deductions of $28,000 produce a neutral cash position before tax, but you still receive a small tax benefit from depreciation. If interest rates rise or the property sits vacant for a period, the loss appears and can be claimed under the current rules or quarantined under the new ones, depending on when you acquired the property.

Timing your purchase to preserve access to full negative gearing

If you want to negatively gear an established property against your salary beyond 30 June 2027, you need to have exchanged contracts by 7:30pm AEST on 12 May 2026. That window has closed.

If you are planning to acquire an established property now, you will be subject to quarantining from 1 July 2027. You can still claim losses against salary until that date if you settle before then, but the benefit period is short and may not justify rushing a purchase.

For public servants expanding your property portfolio, the choice is between buying an established dwelling now and accepting quarantined losses, or targeting eligible new builds that retain the full deduction. The latter requires either buying off the plan in a new development or commissioning a build on vacant land, both of which carry different timing, cost, and risk profiles compared with purchasing existing stock.

How rental income is treated under serviceability assessment

Lenders typically shade rental income by 20 per cent when assessing your borrowing capacity for an investment loan. If a property is advertised at $450 per week, the lender will use $360 per week in the serviceability calculation to account for vacancy periods, maintenance windows, and potential rent arrears.

This shading is applied regardless of whether the property is tenanted at the time of application. If you are refinancing and the property has been continuously tenanted for three years, the lender still applies the 20 per cent reduction. Some lenders accept a lease in place and current rent roll as supporting evidence, but the haircut remains.

For Tasmanian Government employees with secure income, rental shading is one of the larger constraints on how much you can borrow for investment purposes. Choosing a property in a precinct with low vacancy and strong tenant demand does not change the serviceability formula, but it does reduce the risk that your actual cash flow falls short of what you modelled when you applied.

Capital gains tax changes and their effect on long-term returns

From 1 July 2027, the 50 per cent capital gains tax discount for individuals is replaced with cost base indexation and a 30 per cent minimum tax rate on real gains for most investment properties acquired after 12 May 2026.

Gains accrued before 1 July 2027 on properties you already own continue under current rules. For properties acquired after the cut-off, only the gain accruing after 1 July 2027 is subject to the new treatment. Eligible new builds allow you to elect between the 50 per cent discount and the indexed cost base with the minimum rate, giving you the option to choose the method that produces the lower tax.

The combination of quarantined rental losses and reduced capital gains tax concessions makes holding an established investment property more expensive from a tax perspective if you acquire it now. The appeal shifts toward properties that either produce positive cash flow from the outset, or qualify as eligible new builds and retain both negative gearing and favourable capital gains treatment.

When investment loan refinancing makes sense under the new rules

Refinancing an existing investment loan does not change the tax treatment of the property. If you bought before 7:30pm AEST on 12 May 2026, you retain access to full negative gearing regardless of when or how often you refinance.

Refinancing can improve your position if you secure a lower rate, access equity for further investment, or restructure the loan to align with your current tax planning. Moving from a variable rate to a fixed rate, or vice versa, does not affect the deductibility of interest. Increasing the loan amount to fund renovations or to release equity is allowable, but the additional borrowing must be used for income-producing purposes to keep the interest deductible.

For properties acquired after the cut-off, refinancing will not restore negative gearing against salary. The tax treatment is locked in by the acquisition date and the property type, not the loan structure. Debt recycling strategies that involve refinancing non-deductible debt into deductible investment debt remain available, but the benefit of the deduction is now limited to offsetting rental income or future capital gains from residential property, not salary income, unless the property is an eligible new build.

Call one of our team or book an appointment at a time that works for you. We work with Tasmanian Government employees to structure investment borrowing around the new rules, assess whether a property qualifies as an eligible new build, and model the tax and cash flow implications before you commit.

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