Negative gearing changes spark rethink on borrowing to invest

The 2026-27 Federal Budget has reshaped the rules around negative gearing and residential property. But while the new rules may make some established residential properties less attractive from a tax perspective, they don't spell the end of borrowing to invest.  

Instead, growth-focused investors may consider a broader range of wealth-building strategies, including how and whether to borrow against an existing residential property, borrowing to buy shares, and borrowing within a geared share fund.  

Before exploring those options, it's worth understanding how gearing works and the greater level of risk it entails. 

Gearing simply means borrowing money to invest. Investors may borrow to buy assets such as property, shares, exchange traded funds (ETFs) or managed funds with the goal of gaining earlier exposure to assets that may produce income or grow in value over time. 

• An investment is considered positively geared when the income it generates is greater than its deductible expenses. For a property, that means rental income exceeds deductions such as loan interest, repairs and maintenance, property management fees, and non-cash depreciation deductions for the decline in value of depreciation assets.  
• An investment is negatively geared when deductible expenses are higher than the income the investment produces. Subject to tax rules and individual circumstances, that loss may be used to reduce tax payable on other income. 

Many investors use negative gearing as part of a long-term growth strategy. They are often willing to accept a short-term loss in the belief that the asset's value will increase over time. 

However, it's important to remember that borrowing increases risk as well as potential reward. If an investment rises in value, gearing may enhance returns. If the investment falls in value or income declines, losses can be magnified. Rising interest rates can also increase the cost of holding a geared investment.  

Following the 2026-27 Federal Budget and subsequent legislation¹, negative gearing for residential property investment is being restricted to eligible new-build residential property from 1 July 2027.  

Established residential properties held at Budget announcement (7:30pm AEST 12 May 2026): 

• These are generally grandfathered, meaning investors can continue to access the current negative gearing treatment until the property is sold.   
• This has sparked interest in a range of potential borrowing scenarios that we’ll outline later.  
• Properties held up until Budget night, including contracts exchanged but not yet settled, are generally exempt from the changes until disposed of. 

Established residential properties purchased between the Budget announcement and 30 June 2027: 

• These can generally be negatively geared during that period. 
• From 1 July 2027, any losses will be quarantined and can only be offset against income from residential properties such as rental income and capital gains.  

Established residential properties purchased from 1 July 2027: 

• These will not be able to access traditional negative gearing treatment. Any losses will be quarantined and can only be offset against income from residential properties such as rent and capital gains. 

New-build residential properties: 

• These can generally be negatively geared. 
• They include dwellings constructed on vacant land, and developments that increase housing supply, such as where an existing dwelling is replaced with a greater number of homes, such as duplexes, townhouses or apartments.  

A family home owned on Budget night may be eligible for the grandfathered negative gearing rules once it is later converted to an investment property.   

This has led some investors to consider whether the equity in their existing home can help fund the purchase of a new home or an income-generating asset, and whether the interest on any new borrowings can be tax deductible. 

A key principle to understand is that the tax deductibility of the interest on a loan generally depends on what the borrowed funds are used for, not the asset the loan is secured against: 

• If the borrowed funds are used to purchase an income-producing asset, such as an investment property or shares, the interest will generally be deductible. 
• If the borrowed funds are used for private purposes, such as purchasing a new home or funding a holiday, the interest will generally not be tax deductible.  

Let’s look at some case studies to understand how the general interest deductibility rules operate. Note, these are for illustrative purposes only and do not take into account your personal situation. They are not intended to comprise financial, taxation or legal advice and should not be relied upon as such. 

Scenario 1: Borrowing more to buy a new home 

Lisa and Johan owe $500,000 on their existing home and want to buy a new principal residence. They increase the loan against their existing property by a further $400,000 to help fund their new home, then rent out the original property. 

In this situation, only the interest associated with the original $500,000 loan may be deductible when their existing home becomes an investment property. As the additional borrowing was used for a private purpose, being the purchase of a new home, that interest would generally be non-deductible. 

Scenario 2: Using money held in an offset account 

Al and Helen have a $900,000 loan on their existing home and $400,000 sitting in an offset account. They withdraw the $400,000 from the offset account to fund a deposit on a new home and then rent out the original property. 

Potentially, interest on the full $900,000 loan may become deductible once the original property is producing rental income. This is because withdrawing money from an offset account does not create a new borrowing. The original loan remains linked to the property that is now generating rental income. 

Scenario 3: Renovating before renting 

Jack and Sithum want to borrow $300,000 to renovate their home before renting it out. 

Where the borrowed funds are used to improve a property that will generate rental income, the interest may be deductible because there is generally a sufficient connection between the expense and the production of assessable income.  

The negative gearing changes are limited to residential property only and will not affect other asset classes. This means that interest on money borrowed to acquire income-producing investments, such as managed funds, share portfolios and ETFs, can continue to be deductible against the income generated by those investments. Where deductible interest exceeds the investment income, the resulting loss can continue to be offset against income from other sources.   

Investments that generate ongoing income and franked dividends may become relatively more attractive than strategies relying primarily on future capital gains.  

Asset types under consideration for negative gearing may include: 

• Australian blue-chip shares 
• dividend-focused share portfolios 
• listed investment companies (LICs) 
• diversified income funds 
• ETFs that provide regular distributions. 

That said, investors should consider the underlying value of the assets and how they fit your long-term investment strategy. 

While shares, managed funds and ETFs continue to qualify for negative gearing, investors should be aware that the 2026 capital gains tax (CGT) reforms may affect the after-tax return from these investments.  

From 1 July 2027, Australia's longstanding 50% CGT discount will be replaced with a cost-base indexation system and a minimum 30% tax rate on capital gains, applying to gains that accrue after that date. An exception applies to eligible new residential dwellings, which can continue to access the 50% CGT discount.

 As a result, investment strategies that rely heavily on capital growth may become less tax-effective than under previous rules, while investments that generate regular income, such as dividends and distributions, may take on greater importance in the overall return profile. 

There are no changes to investments held in super, which retain their one-third CGT discount under the reforms. 

Some investors may prefer not to borrow directly but still want access to a geared investment strategy. 

A geared share fund borrows within the fund itself, allowing investors to gain leveraged exposure to the sharemarket without arranging their own investment loan. 

Because geared funds can have greater market exposure than an equivalent ungeared portfolio, they may generate higher levels of dividend income and franking credits during strong market periods. 

However, gearing magnifies losses as well as gains. Geared share funds can experience larger swings in value than traditional share funds and may not be suitable for investors who need access to their money over the short term. 

Commercial property remains outside the residential negative gearing restrictions, although it may still be affected by the CGT reforms. These replace the 50% general CGT discount on investment assets held for more than 12 months from 1 July 2027 with CPI indexation and a minimum 30% tax rate on realised capital gains accruing from 1 July 2027, unless an exemption applies.  

Investors may continue to borrow to acquire income-producing commercial assets such as offices, industrial warehouses, retail premises and other business properties, and offset expenses against income. 

As with any investment, commercial property carries risks, including higher average purchase prices, tenant vacancies, changing market conditions and property valuation fluctuations. 

Super continues to benefit from concessional tax treatment. Complying super funds retain their existing one-third CGT discount on assets held for more than 12 months, while earnings are generally taxed at concessional rates.  

As a result, it may be worth assessing whether assets should sit inside or outside super. 

Depending on individual circumstances, this may involve making additional contributions, utilising available contribution caps or directing new savings into super rather than investing personally. 

Investment bonds are another structure some investors may consider. 

Unlike super, investment bonds generally don't have preservation rules that restrict access until retirement. They may appeal to investors saving for medium to long-term goals such as education costs or investing on behalf of family members. 

While investment bonds won't suit everyone, they may form part of a broader conversation about tax-effective investing and long-term wealth creation.  

The changes to negative gearing may encourage investors to rethink how they invest, but it's important to remember investments should stand on their own merits, with a clear rationale for how they may generate income, deliver diversification or create long-term growth. 

A tax deduction only offsets part of a loss. If an investment loses money, you still bear most of the cost. 

Before borrowing to invest, it may help to ask a simple question: would this investment still make sense without the tax benefits? 

Borrowing can be a powerful tool, but it magnifies both gains and losses. Investors should take into account their financial goals, time horizon, cash flow needs and tolerance for risk, and seek financial advice before borrowing to invest.