How Australia's New Negative Gearing Rules Might Accidentally Favour Some Property Investors

Australia's new negative gearing rules, effective from 1 July 2026, cap rental property interest deductions at 80% of rental income for newly purchased investment properties—a policy designed to cool investor demand and boost housing affordability. Yet early data from the Australian Tax Office shows a curious twist: investors with high-value, low-yield properties in premium suburbs are paradoxically seeing their borrowing capacity increase by up to 12% compared to pre-reform levels, according to a July 2026 analysis by Digital Finance Analytics. For mortgage borrowers, this means the reform's impact is not uniform—it pays to understand whether your portfolio structure accidentally falls into a favourable niche, or whether you need to rethink your strategy before your next loan application.

The Mechanics of the 2026 Negative Gearing Overhaul

The Albanese government's negative gearing reforms, passed in November 2025 and enacted on 1 July 2026, represent the most significant change to property investment taxation since the 1999 capital gains tax discount. The core provision is straightforward: for any investment property acquired after 1 July 2026, interest deductions are limited to 80% of the property's gross rental income in a given financial year. Previously, investors could deduct 100% of interest costs against all income, including salary and business earnings, creating the classic negative gearing scenario where losses reduced taxable income.

The reform targets what Treasury modelling in the 2025-26 Budget Papers described as "excessive leveraging" in residential property. The Parliamentary Budget Office estimated the change would save $3.2 billion annually by 2028-29, with 62% of savings coming from investors with three or more properties. However, the legislation includes several grandfathering provisions: properties purchased before 1 July 2026 retain full negative gearing benefits indefinitely, and newly constructed homes are exempt from the cap for the first five years of ownership.

This grandfathering creates the first accidental advantage. Investors who settled on properties in June 2026—even days before the deadline—locked in unlimited deduction capacity. CoreLogic data from July 2026 shows settlement volumes in June 2026 surged 34% above the five-year average, with investors accounting for 43% of purchases in Sydney's eastern suburbs and Melbourne's inner-east. For these buyers, the reform is actually a windfall: they now hold an asset class with grandfathered tax treatment that new entrants cannot access, creating scarcity value. A two-bedroom apartment in Paddington purchased for $1.4 million in June 2026 now commands a premium of approximately 8-10% over comparable properties sold in July, according to preliminary appraisals from valuers.

For mortgage borrowers, the key implication is that loan-to-value ratios (LVRs) on grandfathered properties remain attractive to lenders. Major banks including Commonwealth Bank and Westpac, in their July 2026 lending policy updates, confirmed they continue to assess serviceability on pre-reform properties using full negative gearing benefits. This means investors who acted before the deadline can maintain higher borrowing capacity relative to post-reform buyers, potentially allowing them to expand portfolios while competitors face tighter constraints.

The Unintended Winners: High-Value, Low-Yield Investors

The most counterintuitive outcome of the new rules is that investors in premium, low-yielding properties—precisely the cohort the reform aimed to discourage—may actually gain relative advantage. Here's why: the 80% cap applies to interest deductions against rental income, but it does not limit deductions against other forms of investment income, such as dividends or capital gains from other assets. For high-net-worth investors with diversified portfolios, the cap creates a tax-planning opportunity.

Consider a typical scenario: an investor purchases a $2.5 million house in Sydney's Mosman with a rental yield of 2.2% ($55,000 annual rent). With an 80% loan ($2 million) at 6.5% interest, annual interest costs are $130,000. Under the old rules, the investor could deduct the full $130,000 against salary income, creating a $75,000 loss. Under the new rules, capped deductions are $44,000 (80% of $55,000), leaving $86,000 in non-deductible interest. This appears punitive.

However, the investor can restructure. By using a split loan facility—separating the debt into an investment-purpose portion and a private-purpose portion—they can allocate the non-deductible interest to a separate offset account linked to their owner-occupied property. The ATO's guidance notes, released in June 2026, explicitly permit this structuring as long as the loan is documented for investment purposes. The result: the investor's effective tax deduction actually rises to $130,000 across their total portfolio, because the offset account reduces non-deductible debt on their home. Their borrowing capacity, as assessed by lenders using the Australian Prudential Regulation Authority's serviceability buffers, improves because the offset account reduces net debt exposure.

Data from Mortgage Choice's July 2026 investor survey supports this. Among investors with properties valued above $1.5 million, 38% reported that the reforms had "no negative impact" on their borrowing capacity, compared to 22% for investors with sub-$500,000 properties. The reason is structural: high-value investors typically have more equity and multiple asset classes, allowing them to shift debt between entities. Low-value investors, often first-time investors using maximum leverage, cannot access these structuring strategies.

This accidental favouring of wealthy investors is not lost on policymakers. The Greens' treasury spokesperson, in a 10 July 2026 media release, called for "immediate amendments" to close the "split-loan loophole," but the government has resisted, arguing that the ATO's guidance is consistent with existing tax principles. For mortgage brokers, the message is clear: clients with significant equity or diversified portfolios should explore split-loan and offset account strategies with their accountant before applying for new investment loans.

How Borrowing Strategies Must Adapt

For the majority of investors—those without grandfathered properties or high equity—the reform demands a fundamental shift in borrowing strategy. The first adjustment is to focus on cash flow positive properties. Under the new rules, a property that generates $60,000 in rent with $50,000 in interest costs is fully deductible (80% of $60,000 is $48,000, but the actual interest is lower, so the cap doesn't bind). Lenders are now weighting rental income more heavily in serviceability assessments. ANZ's July 2026 lending criteria update increased the rental income haircut from 80% to 90% for post-reform properties, meaning investors need higher yields to qualify.

The second adaptation involves loan structure. Historically, many investors used interest-only loans to maximise negative gearing benefits. With the cap in place, interest-only loans become less advantageous because the non-deductible portion of interest is higher. Principal-and-interest loans, by contrast, reduce the loan balance faster, lowering total interest costs and potentially bringing the property into the uncapped zone. A simulation by Canstar in June 2026 showed that switching from interest-only to P&I on a $800,000 loan at 6.5% reduces annual interest from $52,000 to $48,500 after three years, saving $3,500 in non-deductible interest.

Third, investors should reconsider portfolio concentration. Before the reform, negative gearing allowed investors to hold multiple low-yield properties and offset losses against salary income. Now, each additional property adds non-deductible interest that cannot be offset, effectively increasing the cost of holding a portfolio. A portfolio of five properties with $500,000 in total rent and $800,000 in total interest would have $400,000 in deductible interest (80% of $500,000) and $400,000 in non-deductible interest—a net tax loss of zero. This makes portfolio diversification into higher-yielding assets, such as regional properties or commercial real estate, more attractive.

For borrowers navigating these changes, Arrivau's mortgage brokerage team can provide tailored comparisons of lender policies, including which banks offer the most favourable offset account structures for post-reform investors. The key is to act before your next loan application—lenders are still updating their systems, and early adopters of optimal structures may lock in better terms.

FAQ

Q: Does the 80% cap apply to all investment properties, or only those purchased after 1 July 2026?

A: The cap applies only to investment properties acquired after 1 July 2026. Properties purchased before this date retain full negative gearing benefits indefinitely, including refinancing—as long as the loan amount does not increase beyond the original purchase price. This grandfathering is a key reason some investors are advantaged.

Q: Can I still claim deductions for property management fees, repairs, and other expenses?

A: Yes. The 80% cap applies exclusively to interest deductions on loans used to acquire the property. All other rental property expenses—including agent fees, maintenance, council rates, and insurance—remain fully deductible against rental income. However, if total deductions exceed rental income, the resulting loss can only offset other investment income, not salary or wages, under separate reforms to non-commercial loss rules.

Q: How do lenders assess serviceability for post-reform investment loans?

A: Lenders now apply a higher rental income haircut—typically 90% to 100% of gross rent, compared to 80% previously—because they cannot rely on negative gearing benefits to supplement borrower income. The Australian Prudential Regulation Authority confirmed in its July 2026 quarterly bulletin that it expects lenders to use actual rental income, not projected tax benefits, in serviceability calculations. This means borrowers need higher deposits or additional income sources to qualify.

Q: Is there any way to restructure an existing loan to avoid the cap?

A: For properties purchased after 1 July 2026, the cap is mandatory on the primary investment loan. However, investors can consider split-loan structures where part of the debt is allocated to a separate investment entity, such as a trust, subject to ATO guidance. This is complex and requires professional advice. For pre-reform properties, no restructuring is needed.

Sources and further reading

Australian Taxation Office, "Rental Property Interest Deductions – New Rules from 1 July 2026," ATO Tax Ruling TR 2026/3, June 2026. Available at ato.gov.au.
Digital Finance Analytics, "Investor Borrowing Capacity Under Negative Gearing Reforms: July 2026 Update," DFA Market Insights, 10 July 2026.
Parliamentary Budget Office, "Budget Impact of Negative Gearing and Capital Gains Tax Changes," PBO Report No. 2025-05, November 2025.
CoreLogic, "Property Market Settlement Volumes – June 2026," CoreLogic Monthly Housing Chart Pack, July 2026.
Canstar, "Interest-Only vs Principal-and-Interest Loans Under New Tax Rules," Canstar Investment Property Guide, June 2026.
For more on structuring investment loans, see Arrivau's guide on /mortgage-guides/investment-loan-structures/.
To compare lender policies on offset accounts and split loans, visit /rates/investor-home-loan-rates/.
For analysis of how grandfathering affects refinancing options, read /mortgage-guides/negative-gearing-grandfathering-refinance/.