The decision to acquire an investment property now turns on whether you held the asset before 12 May 2026.
That date marks the dividing line for negative gearing treatment under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received royal assent on 26 June 2026. Properties held or under contract at 7:30pm AEST on 12 May 2026 retain full negative gearing against salary income indefinitely. Established properties acquired after that point can deduct losses only against other residential property income from the 2027-28 income year. Eligible new builds remain exempt.
The capital gains treatment also splits at 1 July 2027. Gains accruing before that date attract the 50 per cent discount. Gains accruing after attract cost base indexation and a 30 per cent minimum tax rate on real gains. For properties owned before 1 July 2027 and sold afterward, you apportion the gain across the two periods using either a market valuation or an ATO formula.
Does a Contract Under Settlement on 12 May 2026 Qualify for Grandfathering
Yes, provided exchange occurred at or before 7:30pm AEST on 12 May 2026. The legislation grandfathers properties "held" at that time, and the explanatory memorandum confirms that a binding contract under which the purchaser has not yet settled is sufficient. Settlement date is irrelevant for grandfathering purposes.
Consider a solicitor who exchanged on a two-bedroom unit in Southbank, Melbourne on 10 May 2026 with settlement scheduled for mid-June. The property qualifies for unrestricted negative gearing because the binding contract existed before the cutoff. The same solicitor looking at a comparable unit in the same building today would face a different outcome: any losses from the 2027-28 income year onward could offset only rental income or capital gains from other residential investments, not salary.
The distinction matters for portfolio sequencing. If you already hold grandfathered properties producing positive income, acquiring a new established property that generates a loss offers no immediate salary offset. If you hold no investment property yet, the first acquisition carries more weight than it did previously.
What Qualifies as an Eligible New Build for Negative Gearing Purposes
An eligible new build is a dwelling constructed on previously vacant land or a dwelling that replaces an existing property where the total number of dwellings increases. Knock-down rebuilds that do not increase dwelling numbers do not qualify. Substantial renovations do not qualify. A new build occupied for more than 12 months before sale loses eligibility for the subsequent purchaser.
A solicitor acquiring an off-the-plan apartment in a new development at Waterloo, Sydney would retain full negative gearing provided the project increases dwelling numbers. The same solicitor acquiring a renovated terrace in Glebe, regardless of the renovation scope, would not. The new build exemption extends to capital gains: investors in eligible new builds can choose at the time of disposal between the old 50 per cent discount and the new indexation with 30 per cent minimum rate, selecting whichever produces the lower tax.
This creates a structural advantage for new builds when expanding your property portfolio, particularly where the investor's marginal rate exceeds 30 per cent and rental losses are expected in early years.
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How Do DTI Limits Affect Investment Loan Approval from 1 February 2026
APRA activated a DTI lending limit from 1 February 2026. Each authorised deposit-taking institution may lend up to 20 per cent of new investor loans to borrowers with a total DTI ratio of six times or greater, measured quarterly. The limit applies separately to investor and owner-occupier portfolios and covers only new lending. Existing borrowers are unaffected. Bridging loans and loans for new dwellings are excluded. Non-ADI lenders are not currently subject to the limit.
Total debt includes all residential lending: owner-occupied and investment, principal-and-interest and interest-only. Income is gross annual income before tax. A solicitor earning $180,000 with an existing $900,000 owner-occupied loan and applying for a $600,000 investment loan would present a DTI ratio of 8.3. That application would fall within the 20 per cent allocation unless the lender had already exhausted its quarterly allocation for high-DTI investor lending.
Lenders manage the allocation by adjusting approval rates and pricing throughout each quarter. In practice, high-income borrowers with strong serviceability continue to secure investment loan approval, but the approval may arrive later in the quarter or require a slightly larger deposit to bring the ratio below six. Serviceability remains the binding constraint for most applicants: lenders still assess capacity at the loan product rate plus a 3.0 percentage point buffer, and that buffer has not changed since October 2021.
How Does LVR Affect Capital Requirements and Pricing for Investment Loans
Prudential Standard APS 112, which commenced on 1 July 2025, prescribes specific risk weights for residential mortgage exposures based on loan classification, occupancy status and LVR. Investment loans attract higher risk weights than owner-occupied principal-and-interest loans at the same LVR. Higher risk weights increase the capital an ADI must hold, which flows through to investor pricing.
An investment loan with an LVR above 80 per cent will generally require lenders mortgage insurance. The premium is borne by the borrower and calculated on a sliding scale based on loan amount and LVR. Solicitors may access LMI waivers through certain lenders depending on employment status and loan amount, reducing upfront costs where the LVR exceeds 80 per cent but remains within the waiver threshold, typically 90 per cent.
Offset account balances do not reduce the loan amount for LVR purposes under APS 112. A $500,000 loan secured by a $625,000 property with $100,000 in offset still presents an 80 per cent LVR, not 64 per cent. The offset reduces interest paid but does not reduce regulatory capital requirements or LMI assessment.
Should You Fix or Vary the Rate on an Investment Loan Acquired After 12 May 2026
The question depends on your view of the rate cycle and your capacity to absorb rate movements without accessing offset or redraw. Fixed rates provide certainty but generally prohibit additional repayments and do not allow offset. Variable rates fluctuate but allow offset and additional repayments without restriction.
For an established investment property acquired after 12 May 2026, losses are quarantined from salary income from the 2027-28 income year. The ability to offset interest against salary in the 2026-27 income year remains, but from 2027-28 onward, reducing taxable income depends on holding other residential property income. If the property will be negatively geared and you hold no other residential investments, the tax benefit of the interest deduction reduces substantially.
That shifts the calculus toward minimising total interest cost rather than maximising deductible interest. A variable rate with full offset allows you to park surplus cash against the loan, reducing effective interest while preserving liquidity. A fixed rate without offset may lock in a lower headline rate but prevents you from reducing interest through offset, and you will pay interest on the full loan amount regardless of cash reserves.
How Does the 1 July 2027 CGT Change Affect Holding Period Decisions
For properties acquired after 12 May 2026, you will pay tax on capital gains using two different methods depending on when the gain accrued. Gains accruing before 1 July 2027 attract the 50 per cent discount. Gains accruing after attract cost base indexation and a 30 per cent minimum tax rate on real gains.
A solicitor acquiring an investment property in late 2026 and selling in early 2028 would apportion the gain. If the property appreciated by $60,000 over eighteen months, with $20,000 of that gain accruing before 1 July 2027 and $40,000 after, the first portion would be taxed under the discount method and the second under the indexation method. The apportionment requires either a market valuation at 1 July 2027 or application of an ATO formula.
If the property has appreciated substantially by mid-2027 and you expect slower growth thereafter, realising the gain before 1 July 2027 captures the entire gain under the 50 per cent discount. If the property has appreciated modestly and you expect stronger growth in an inflationary environment, holding beyond 1 July 2027 allows you to index the cost base, reducing the real gain subject to tax.
For eligible new builds, you can choose between the two methods at the time of disposal, selecting whichever produces the lower tax. That optionality has value and reinforces the structural advantage of new builds in the current legislative environment.
What Happens to Foreign Investment Loan Demand Under the Established Dwelling Ban
Foreign persons, including temporary residents, are banned from purchasing established dwellings from 1 April 2025 to 30 June 2029 under the Foreign Acquisitions and Takeovers Act 1975. The ban was extended by two years and three months in the 2026-27 Budget. Limited exceptions apply, including developments that increase housing supply, Build to Rent projects, and purchases by foreign companies employing workers under the Pacific Australia Labour Mobility scheme. Permanent residents and New Zealand citizens remain exempt.
The ban removes a segment of investment loan demand for established stock. Temporary residents who previously acquired established apartments in inner-city precincts such as Melbourne CBD, Ultimo or Fortitude Valley can no longer do so. Lenders who previously offered investment loan products to temporary residents with offshore income have reduced or withdrawn those products. The demand has not disappeared but has shifted to new builds and vacant land, where temporary residents can still apply for Foreign Investment Review Board approval.
For solicitors acquiring established stock, the reduction in foreign demand may exert downward pressure on prices in precincts and property types where temporary residents previously represented a material share of purchasers. That effect is localized rather than systemic and depends on the composition of historical demand in each precinct.
Does Rental Income from an Investment Property Affect Your Borrowing Capacity for a Subsequent Purchase
Yes, subject to a rental income shading factor applied by the lender. Most lenders assess 80 per cent of rental income when calculating serviceability, reflecting vacancy periods, management costs and potential arrears. A property generating $30,000 in annual rent contributes $24,000 to assessed income. Interest expense on the investment loan is deducted in full when calculating net rental income for serviceability purposes.
A solicitor holding one investment property generating $30,000 in rent with an interest-only loan costing $28,000 per year in interest would show a net assessed rental income of $24,000 minus $28,000, or negative $4,000. That figure reduces borrowing capacity for the next purchase. If the same property were held on a principal-and-interest basis with total repayments of $40,000 per year, only the interest component would be deducted for serviceability purposes, so the result remains the same.
Lenders do not assess rental income at 100 per cent. If you are relying on rental income to support a subsequent purchase, the shading factor matters. The net rental position after shading and interest deduction will either add to or subtract from your borrowing capacity. Where you already hold multiple investment properties, refinancing your investment loan to a lower rate or switching from interest-only to principal-and-interest can improve the net rental position and increase capacity for the next acquisition.
The deductibility of losses against salary no longer improves your tax position for properties acquired after 12 May 2026, but the rental income and interest expense still flow through the serviceability assessment in the same manner. The lender is calculating capacity to service debt, not tax outcomes, and the rental shading factor applies regardless of the negative gearing treatment.
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Frequently Asked Questions
Do properties under contract on 12 May 2026 qualify for unrestricted negative gearing?
Yes, provided exchange occurred at or before 7:30pm AEST on 12 May 2026. Settlement date does not affect grandfathering status.
What counts as an eligible new build for negative gearing exemption purposes?
Dwellings constructed on vacant land or dwellings that replace existing properties where total dwelling numbers increase. Knock-down rebuilds without increased density and substantial renovations do not qualify.
How do DTI limits from 1 February 2026 affect investment loan approval?
Lenders may allocate up to 20 per cent of new investor loans to borrowers with a DTI of six or more. High-income borrowers continue to secure approval but may experience timing delays or require a larger deposit to reduce the ratio.
Does the CGT treatment change on 1 July 2027 affect properties I already own?
Yes. Gains accruing before 1 July 2027 attract the 50 per cent discount, and gains accruing after attract cost base indexation and a 30 per cent minimum rate. You apportion the gain using a valuation or ATO formula.
Can rental income from an investment property improve borrowing capacity for another purchase?
Only where net rental income after shading and interest deduction is positive. Most lenders assess 80 per cent of rental income and deduct the full interest cost, so negatively geared properties reduce capacity.
