Millions of Australians have used rental losses to reduce taxable income, yet the federal budget announced on 12 May 2026 will stop most new purchases doing that from 1 July 2027. Under current law the Australian Taxation Office treats rental income and deductible expenses as ordinary assessable income and deductions, which means net rental losses can be offset against wages and other income. Treasury records show in 2012-13 over 1.9 million people earned rental income, about 1.3 million reported a net rental loss, and nearly 70 percent of people with negatively geared property had taxable incomes under $80,000. The budget measure says properties held before budget night keep existing arrangements, while new-build residential properties bought after the cut-off will remain eligible to offset losses, and established housing bought after budget night will face a carry-forward only approach.

The Treasury treats rental losses as ordinary deductible expenses, while the 2026-27 federal budget carves out a new test that will limit loss offsets to new builds from 1 July 2027.

1. Confirm eligibility: ownership date and what counts as a new build

Check the ownership and contract dates first. The immediate question for any buyer or investor is whether a property is treated under the existing rules or under the announced change. The government made the announcement in the federal budget on 12 May 2026 and set 1 July 2027 as the date when the new rule would take effect. The budget materials say properties held before budget night will retain current arrangements. Established housing purchased after budget night will have a more constrained loss-use path, while new-build residential properties bought after that cut-off will continue to allow losses to be offset against other income.

One practical complication is that the budget materials leave several details to be specified in final legislation. The documents and a bank explainer identify key drafting points that will be important for investors: whether the relevant date is the contract date or the settlement date, how off-the-plan purchases are treated, and the legal definition of a "new build". If you are buying, check the contract and establish which date will determine whether the purchase is treated as pre- or post-budget for the announced rule.

Worked example: if you already hold a rental property on budget night, your current claims remain unchanged. If you sign a contract for established housing after budget night, the announced approach indicates you won't be able to offset future rental losses against your wage income; instead those losses will be carried forward to be used against residential property income only, subject to the final law.

2. Gather and classify income and deductible expenses

Record everything that feeds into your rental income and deductions. Under the Australian Taxation Office framework rental income is assessable income and you may claim expenses incurred in producing that income.

Typical deductible items the ATO and Treasury list include interest on loans, council rates, land tax, property insurance, property management fees, advertising for tenants and repairs for damage.

Distinguish repairs from capital improvements. Repairs to fix wear or accidental damage are generally immediately deductible. Capital works and improvements are not ordinarily deductible in full in the year they're incurred; they are written off over time under the tax rules. The law treats capital works under Division 43 and plant and equipment items under Division 40. The announced 2027 change applies to residential housing specifically, but Treasury material also notes that any investment asset can be negatively geared under the broader tax model.

Worked example: if you replace a broken window after a tenant incident, that's typically a repair and deductible in the year. If you add an extension or reconfigure the floor plan, that's likely to be capital in nature and written off under Division 43 instead.

Mastheads

3. Depreciation, tax-year accounting and practical checks

Get on top of Division 40 and Division 43 deductions, then complete the tax-year accounting. Capital works deductions for residential buildings constructed after 1987 commonly use a 2.5 percent rate per year over 40 years under Division 43. Plant and equipment items such as carpets, ovens, hot water systems and air conditioners are depreciated under Division 40 with different effective lives depending on the item. Note that since May 2017, second-hand plant and equipment in residential properties has restricted eligibility for those deductions.

A depreciation schedule prepared by a quantity surveyor documents both Division 40 and Division 43 deductions and the cost of preparing that schedule is itself tax deductible. Guides aimed at investors report typical quantity surveyor fees in the range cited by market guides, and those guides note the schedule frequently pays for itself in tax savings during the first year.

Calculate total rental income, total allowable deductions, and report the net result. If your rental expenses exceed rental income the net position is a loss and, under current law, that loss reduces other assessable income in the same year. The tax benefit from a rental loss depends on your marginal tax rate; the same dollar loss produces a larger tax saving for a higher-income taxpayer.

The budget announcement changes the forward flow for new purchases made after budget night. The proposed rules indicate those losses will be carried forward and used against future residential property income, but not to offset other income such as wages. That shifts how a carried-forward loss is treated on subsequent tax returns, and it makes it important to track carried-forward loss balances carefully when preparing future tax returns.

Worked example: for a post-1987 residential building you will typically claim a Division 43 deduction at 2.5 percent of the capital works base each year. Plant and equipment items will have their own decline-in-value calculations documented in the depreciation schedule. If you buy established housing after budget night and generate a rental loss, under the announced approach that loss won't be available to reduce wages or salary income in the year; instead the loss will be tracked and applied only against future residential property income as defined in the final legislation.

Keep records and get specialist input for tricky cases. Hold the evidence the ATO expects and seek professional advice where needed. Keep rent statements, loan documents showing interest, receipts for repairs and maintenance, council rates notices, insurance invoices and property manager statements. If you claim depreciation, retain the quantity surveyor report and any invoices for plant and equipment. Treasury and ATO guidance assumes claims are supported by contemporaneous records.

Get specialist help if your ownership structure or property types are complex. Consult a registered tax agent, accountant or lawyer for multiple properties, mixed-use assets, intricate capital gains timing, or if you are planning purchases near the 1 July 2027 threshold. The budget statement flags that issues such as contract date, settlement date, off-the-plan timing and the legal definition of new builds will be set out in final legislation, so advice is particularly important for transactions that might be affected by those rules.

Common pitfalls and practical checks

Be precise about timing and the nature of expenses. First, verify whether an expense is deductible in the year it's incurred or must be capitalised and depreciated. Second, keep dates for each work or expense so you can show whether an item was a repair or a capital improvement. Third, remember the capital gains tax concession that applies to assets held more than 12 months interacts with negative gearing as part of the overall investment return calculation.

Also, keep a running balance of any carried-forward losses and label them clearly in your records. For properties purchased after the budget announcement, plan for the announced constraint on using rental losses against non-property income and for the administrative task of tracking carried-forward losses to be applied only against future residential property income under the proposed approach.

For you who need to act now: confirm ownership and contract dates for any transaction, preserve full records for tax reporting and any future legislative tests, and seek tailored advice if your situation is close to the 1 July 2027 threshold.

In short

1. Confirm whether your property is treated under current rules or the announced 2027 change by checking contract and ownership dates. 2. Collect and classify rental income and deductible expenses, separating repairs from capital works. 3. Use a depreciation schedule for Division 40 and Division 43 items. 4. Lodge your tax return showing net rental income or loss, and track any carried-forward losses carefully. 5. Get professional advice if you have complex ownership, off-the-plan purchases, or transactions near 1 July 2027.

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The concrete date to watch is 1 July 2027, when the budget announced the new carve-out for negative gearing takes effect; the final legislation will set the contract and settlement tests that decide whether a purchase is treated as a new build or established housing.

This article was created with AI assistance.