Negative Gearing Mistakes and How to Avoid Them

Negative gearing still works for residential investment property bought before May 2026, but federal tax law changed the rules for purchases from that date onwards.

Investors in Hawthorne looking at rental property now face a split system. Properties you already own, or contracted to buy before 7:30pm on 12 May 2026, can still offset rental losses against your salary or business income under the old rules. Anything purchased after that cutoff is caught by new quarantine provisions that take effect from 1 July 2027. Rental losses on those properties can only be offset against other rental income or carried forward to use against future rental income or capital gains when you sell.

The change means the structure of your investment loan matters more than it used to. You cannot retrospectively change when you bought the property, but you can control how much you borrow and which loan features you lock in at the start.

How the Quarantine Rule Actually Works

From 1 July 2027, net rental losses on residential property acquired after 7:30pm on 12 May 2026 cannot reduce your taxable income from wages, business income or other non-rental sources.

Consider an investor who settles on a two-bedroom unit near Hawthorne Park in August 2026. Rent covers $32,000 a year. Interest on the loan, council rates, insurance, body corporate, depreciation and agent fees add to $38,000. That leaves a $6,000 annual loss. Under the old rules, that loss could be claimed against salary to reduce the investor's taxable income. Under the new rules applying from 1 July 2027, the $6,000 loss is quarantined. It cannot be used to reduce wage income but is carried forward to offset future rental profits or, at sale, reduce the capital gain.

The investor still owns the property, still claims every deductible expense, and still benefits when the property increases in value. The timing of the tax benefit shifts from annual to deferred. That changes the cashflow equation and affects how much deposit you should consider putting down.

New Builds Keep Full Deductibility

Eligible new residential dwellings are exempt from the quarantine rule.

A new build is defined as a dwelling constructed on previously vacant land or a development that increases the total number of dwellings on the site. A knock-down rebuild that replaces one house with another single house does not qualify. Substantial renovations also do not qualify. The exemption is lost if the new dwelling is occupied for more than 12 months before being sold to a subsequent investor.

Hawthorne has limited vacant land, but small-lot subdivisions and townhouse developments near Wynnum Road occasionally come to market. An investor purchasing a newly completed townhouse directly from the developer in one of these projects can still claim rental losses against salary under the old rules, even though the purchase occurs after the May 2026 cutoff.

The tax treatment affects property selection. A new townhouse priced 10 to 15 per cent above an equivalent established unit might still deliver better after-tax returns if the rental yield is marginal and you are in a higher tax bracket.

Interest-Only Versus Principal and Interest Repayments

Interest-only repayments used to be popular because they maximised the interest deduction and kept cashflow low.

Under quarantine rules, maximising the interest deduction only matters if you have other rental income to offset it against or if you expect to use the carried-forward losses within a reasonable time. If you plan to hold the property long-term and your rental income stays close to breakeven, paying interest-only for five years simply defers principal repayments without delivering a current tax benefit.

Principal and interest repayments reduce your loan balance, which lowers future interest charges and brings forward the point at which the property becomes positively geared. Once rental income exceeds expenses, quarantine no longer affects you because there are no losses to quarantine. Some investors now favour principal and interest structures on properties caught by the new rules, particularly if they expect rental growth to outpace expense growth over the medium term.

Interest-only still makes sense when you have multiple rental properties and can use losses from the new property to offset income from older ones. It also works when you plan to sell within a few years and use the carried-forward losses to reduce the capital gain.

Borrowing Capacity Under the New Rules

Lenders assess borrowing capacity using net rental income, which means they deduct all property expenses including the full loan repayment.

The quarantine rule does not change how lenders calculate serviceability, but it does change the actual cashflow you experience after tax. An investor who could previously claim a $6,000 rental loss and receive a $2,800 tax refund at a 47 per cent marginal rate now has to fund that $6,000 from after-tax income without any immediate refund.

That means you need either a larger deposit to reduce the loan amount, higher rental income to reduce the loss, or sufficient surplus income to cover the shortfall. Lenders will still approve the loan if it meets their serviceability buffer, but you need to be confident you can manage the cashflow without the annual tax offset.

Investors applying for loans on post-May 2026 purchases should model repayments assuming no refund from rental losses. If the numbers only work with a tax refund factored in, the property is probably overleveraged for the new environment.

Transition Period and Timing

Properties purchased between 7:30pm on 12 May 2026 and 30 June 2027 can still use negative gearing under the old rules until 30 June 2027.

An investor who settled in Hawthorne in November 2026 will lodge their 2026-27 tax return in the usual way, claiming rental losses against salary. From 1 July 2027 onwards, losses on that same property are quarantined. The transition is property-specific, not portfolio-wide. Older properties you bought before the May cutoff continue under the old rules indefinitely.

If you exchanged contracts before 7:30pm on 12 May 2026 but settled afterwards, the property is grandfathered and negative gearing continues under the old rules for as long as you own it. Settlement date does not control grandfathering; contract exchange does.

Variable Rate Versus Fixed Rate Investment Loans

Fixed rates offer repayment certainty but come with break costs if you repay early or refinance before the fixed term ends.

Variable rates give you flexibility to make extra repayments, redraw funds if the loan allows it, and refinance without penalty. Under the new tax rules, flexibility becomes more valuable because your strategy might need to change as rental income grows or your circumstances shift.

If you fix the rate for three years on a negatively geared property and rental income turns positive in year two, you might want to restructure the loan or pay down principal faster. A variable rate lets you do that without cost. Fixed rates suit investors with tight cashflow who need to lock in repayments and can model their position accurately over the fixed period.

Loan Features That Matter More Now

Offset accounts, redraw facilities and the ability to split your loan between fixed and variable portions become more relevant when tax benefits are deferred.

An offset account linked to your investment loan reduces the interest charged without reducing the loan balance. That keeps your deductible debt high while lowering your actual repayments. If you are quarantining losses and cannot use them immediately, reducing your interest cost by parking surplus cash in an offset achieves the same cashflow outcome without waiting for a tax refund.

Redraw lets you access extra repayments you have made, but not all lenders allow redraw on investment loans and some charge fees. Loan splits let you fix part of the loan for certainty while keeping part variable for flexibility. A 50/50 split is common, but you can weight it however you like depending on your risk tolerance and refinancing plans.

When Refinancing Makes Sense

If you bought an investment property before May 2026 and refinance it now, the grandfathering stays with the property, not the original loan.

You can refinance to a different lender, get a lower rate, or access equity for another purchase without losing the ability to claim rental losses against salary. The key date is when you acquired the property, not when you took out or refinanced the loan.

Refinancing becomes particularly relevant if you are paying Lenders Mortgage Insurance (LMI) on your current loan and your property has increased in value. Refinancing to a loan with a lower loan-to-value ratio can eliminate LMI on the new loan and reduce your rate. Some lenders also offer better investment loan features than others, including offset accounts, lower fees and higher borrowing limits.

How LBK Lending Structures Investment Loans for Post-2026 Purchases

Call one of our team or book an appointment at a time that works for you. We compare investment loan options from banks and lenders across Australia and walk through how the new rules affect your specific scenario, your deposit size, and whether the property qualifies as a new build. We also model repayments with and without tax offsets so you can see the real cashflow and decide what fits your income and your plans for the property.

Frequently Asked Questions