Negative Gearing & What Not to Expect From 2027

Negative gearing as you know it changes from July 2027 if you buy an established property after Budget night in May 2026.

If you're looking at investment loans in Surry Hills, you need to understand what's grandfathered, what's restricted, and what still works. The confusion isn't whether negative gearing disappears. It's about who it applies to, and how the tax benefit now depends on when you bought and what type of property you chose.

What Negative Gearing Means in Practice

Negative gearing happens when your rental property costs more to hold than it earns. You claim that shortfall as a tax deduction against your other income. If your investment property in Surry Hills costs $4,000 per month in loan repayments, strata, rates, and insurance, but only brings in $3,200 in rent, you're negatively geared by $800 per month. Under the old rules, that $9,600 annual loss reduces your taxable income from your salary or business.

From 1 July 2027, if you bought an established residential property after 12 May 2026, that $9,600 loss can only be claimed against rental income or capital gains from residential property. It won't reduce your wage income. If you don't have other residential property income, the loss carries forward until you do.

Who the Changes Apply To

The new rules only affect residential investment properties purchased after 7:30 pm on 12 May 2026. If you already own an investment property, or if you exchanged contracts before that date, your existing arrangements continue. You can still claim rental losses against your salary.

Commercial property is unaffected. If you're looking at a retail or office investment, the existing negative gearing rules remain.

New builds also remain incentivised. Investors who buy newly constructed residential property can still claim rental losses against all income, not just property income. The government carved out new builds to encourage housing supply.

How This Affects Surry Hills Investors

Surry Hills sits in an area where most available stock is established apartments, many in older heritage buildings or converted warehouses. If you're buying one of those apartments now, and settlement happens after 12 May 2026, the restricted negative gearing rules apply from 1 July 2027.

Consider someone buying a two-bedroom apartment in one of the Art Deco blocks near Cleveland Street. Purchase settles in late 2026. Rent covers about 70% of holding costs. Under the old rules, the investor claims the shortfall against their income as a designer earning $120,000 per year. Under the new rules, they can't. The loss carries forward until they sell or until they acquire other residential property that's positively geared or generates a capital gain.

That doesn't make the purchase unviable. It changes the cash flow and the timeline for when the tax benefit materialises. Some investors will absorb the shortfall from after-tax income and bank the deduction for later. Others will look at refinancing to interest-only to reduce the holding cost, or they'll target properties closer to neutral or positive cash flow.

What Happens to Carried Forward Losses

Losses you can't claim in one year don't disappear. They carry forward indefinitely and can be offset against future residential rental income or capital gains from residential property.

If you hold a negatively geared property for ten years, then sell and realise a capital gain, those accumulated losses reduce the taxable portion of the gain. If you later acquire a second residential property that's positively geared, you offset the new property's taxable income with the carried forward losses from the first.

That structure works for long-term investors building a portfolio. It's less useful if you're relying on immediate tax relief to make the cash flow manageable in the early years.

Capital Gains Tax Changes From 2027

The Budget also replaced the 50% capital gains tax discount with a system based on inflation, and introduced a minimum 30% tax on gains. Both changes take effect from 1 July 2027, and only apply to gains that accrue after that date.

If you bought a Surry Hills apartment in 2024 and sell in 2030, the gain up to 1 July 2027 is still eligible for the 50% discount. Only the gain from 1 July 2027 onwards is subject to the new rules. The government describes this as cost base indexation, meaning you only pay tax on the real gain after adjusting for inflation.

Investors in new builds can choose between the 50% discount or the new arrangements, whichever delivers the lower tax. Your main residence remains exempt, and super funds aren't expected to see changes to their capital gains treatment.

Interest Only vs Principal and Interest

Many investors switch to interest-only repayments to reduce holding costs and maximise the interest deduction. Under the new rules, that strategy still works if you're trying to minimise out-of-pocket costs, but it doesn't change the fact that losses from established properties can't offset your salary.

Interest-only loans for investment property finance are typically approved for five years, then revert to principal and interest unless you apply to extend. Most lenders cap interest-only periods at ten years total. If your property is negatively geared and you can't claim the loss against other income, switching to interest-only reduces the monthly shortfall but doesn't unlock the tax deduction.

If you're buying a new build, the interest-only structure works exactly as it did before. You claim the full interest cost against your income, and the reduced repayment gives you more flexibility for portfolio growth or other commitments.

How Lenders Assess Investment Loans Now

Lenders calculate serviceability on investment loans by adding a buffer to the interest rate and applying a rental income haircut, usually 20%. That means if your Surry Hills apartment rents for $4,000 per month, the lender only credits you with $3,200 when assessing whether you can afford the loan.

The Budget changes don't alter how lenders assess borrowing capacity, but they do affect your actual cash flow once the loan settles. If you were planning to claim $10,000 in rental losses against your salary each year, and that's no longer possible, you need to fund that shortfall from after-tax income. Some buyers adjust their purchase budget down to target properties closer to neutral cash flow. Others proceed but factor the shortfall into their spending and savings.

If you're refinancing an existing investment loan, the same serviceability rules apply. The fact that your property is grandfathered under the old negative gearing rules doesn't change how a new lender assesses the loan.

What Still Makes Sense for Surry Hills Buyers

Surry Hills remains tightly held, with low vacancy rates and strong tenant demand. The area attracts long-term renters, many of whom work in the city or in the tech and creative sectors clustered around the inner east. Properties close to Central Station or within walking distance of cafes along Crown Street tend to hold value and rent consistently.

If you're buying after the Budget changes, the property still needs to make sense on fundamentals. That means location, tenant demand, and capital growth potential. The tax treatment is part of the equation, not the entire reason to buy.

Some investors will shift focus to new builds or to commercial property where the old rules still apply. Others will continue buying established stock in Surry Hills because the location supports long-term growth, and they're prepared to carry the shortfall without the immediate tax offset.

Call one of our team or book an appointment at a time that works for you. We'll walk through your specific situation, show you how the changes affect your borrowing capacity and cash flow, and help you structure an investment loan that aligns with what you're actually trying to achieve.

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