The easiest way to use negative gearing in Melbourne

Negative gearing lets you claim your rental property's net loss against other income, which can reduce your tax bill during the growth phase of an investment.

If you're deciding whether to buy an established property or a new build in Melbourne right now, the rules changed on Budget night in May. Properties purchased before 7:30 pm AEST on 12 May 2026 keep the existing arrangements. For established properties bought after that date, you'll only be able to offset losses against rental income or capital gains from residential property from 1 July 2027 onwards. New builds remain fully deductible regardless of when you buy.

How negative gearing worked before the Budget

A property is negatively geared when your deductible expenses exceed the rental income it generates. Expenses include loan interest, property management fees, council rates, insurance, maintenance, and depreciation. If those costs add up to more than the rent you collect, the shortfall could be claimed as a deduction against your wage or salary income, lowering your taxable income and your annual tax bill.

Consider an investor who bought an established apartment in Footscray before Budget night. Annual rent brings in $26,000, but loan interest costs $32,000, with another $6,000 in rates, insurance, strata fees, and other holding costs. The property runs at a $12,000 annual loss. Under the old rules, that $12,000 could be deducted against the investor's salary, potentially saving them around $4,400 in tax if they were in the 37% tax bracket. The out-of-pocket cost after the tax refund would be closer to $7,600 for the year.

What changed for properties bought after 12 May 2026

From 1 July 2027, losses on established residential properties purchased after Budget night can only be offset against rental income or capital gains from residential property. You won't be able to claim them against your wage or salary anymore. Losses you can't use in a given year can be carried forward and applied to future rental income or when you eventually sell the property, so the deduction isn't lost entirely, just deferred.

New builds purchased after Budget night keep full negative gearing deductions, and the government has also given new build investors a choice between the old 50% capital gains tax discount or the new inflation-indexed system when they sell. The intention is to encourage construction and increase housing supply. If you bought an established property before Budget night, nothing changes for you regardless of when you sell.

Commercial properties and other asset classes like shares are not affected by the changes. The restrictions apply only to established residential investment properties bought after the Budget.

When negative gearing still works after the changes

Negative gearing remains useful if you're building a portfolio and can absorb short-term losses while waiting for capital growth and rent increases. If you're buying a new build anywhere in Melbourne, the full tax offset still applies. If you're looking at an established property bought after Budget night, the strategy still makes sense if you expect strong capital growth, you have other investment loans generating rental income that can absorb the loss, or you plan to sell within a timeframe where carrying forward the deduction delivers value.

In our experience, clients who focus solely on tax deductions often overpay for properties in weak growth areas. The tax benefit might save you a few thousand dollars a year, but if the property doesn't grow in value or stays vacant for long stretches, you're worse off overall. A property that's positively geared or close to neutral from the start, in a suburb with solid tenant demand and a history of price growth, will usually outperform a heavily negatively geared property in a softer market, even with the old tax treatment.

For someone buying an established property in a suburb like Brunswick or Coburg, where rental demand is consistent and vacancy rates stay low, a modest negative gearing position might still be manageable. You're covering a small shortfall each year, but the property is likely to appreciate and eventually move toward positive cash flow as rents rise. The carried-forward losses can then be applied when you sell or against future rental income if you grow your portfolio.

Structuring the loan to suit your cash flow

One of the most common questions we get is whether to go interest-only or principal and interest on an investment loan. Interest-only repayments are lower, which increases your negative gearing loss and can improve short-term cash flow. Principal and interest repayments build equity faster and reduce your loan balance over time, but they also increase your holding costs and your annual loss.

If you're in a scenario where you're buying an established apartment in Southbank after Budget night, and you know the property will run at a loss for the first few years, an interest-only period might make sense if you're planning to use that cash flow buffer to save for another deposit or manage other commitments. Once the new rules apply from mid-2027, the deduction will be limited, so the short-term tax advantage shrinks. At that point, switching to principal and interest might make more sense, especially if you're not carrying other residential property income to offset the loss against.

Lenders typically offer interest-only periods of up to five years on investment loans, after which the loan reverts to principal and interest unless you apply for an extension. That reversion increases your repayments significantly, so it's worth modelling what your cash flow looks like at that point and whether you'll still be comfortable holding the property. We regularly see investors who structure a loan assuming they'll refinance or sell before the interest-only period ends, then find themselves stretched when repayments jump.

Claimable expenses and how they add up

Even with the changes to negative gearing, you can still claim the same expenses as before. Loan interest remains the largest deduction for most investors. Property management fees, council rates, water charges, landlord insurance, strata fees for apartments, repairs and maintenance, and depreciation on the building and fixtures all remain deductible. Stamp duty and other upfront purchase costs can't be claimed as an immediate deduction, but they form part of your cost base when calculating capital gains tax.

Depreciation is often underutilised. A quantity surveyor can prepare a depreciation schedule that breaks down the claimable decline in value of the building and the fixtures inside it. For a newer property, especially a recent build in an area like Docklands or Fishermans Bend, the annual depreciation claim might be several thousand dollars. For an older established property, the building depreciation may have already run its course, but you can still claim depreciation on renovations, appliances, and fixtures you've replaced.

Under the new rules, these deductions will still reduce your taxable rental income or be carried forward if you can't use them in the current year. The mechanics of what you can claim haven't changed, just where you can apply the resulting loss from 1 July 2027 onwards.

Choosing between new builds and established properties now

If you're comparing a new apartment in an inner-city development against an established townhouse in Reservoir, the tax treatment is now one part of a broader decision. New builds come with full negative gearing benefits, a potential choice on capital gains tax treatment when you sell, and often higher depreciation deductions. Established properties may offer better land-to-asset ratios, more immediate rental demand in proven locations, and a clearer price history.

From a borrowing capacity perspective, lenders assess new builds and established properties slightly differently. Some lenders apply higher scrutiny to off-the-plan purchases or apartments in high-density precincts, particularly if there's a risk of oversupply. If you're buying a new apartment in a building where many units are settling at the same time, the lender may apply a discount to the contract price when determining how much they'll lend. Established properties in suburbs with consistent sales data and low vacancy rates often attract more competitive pricing from lenders.

The decision should come down to where you see the stronger combination of capital growth, rental yield, and tenant demand over the period you plan to hold the property. The tax settings matter, but they shouldn't override the fundamentals of the investment itself.

What to consider before you commit

Before you buy any investment property in Melbourne, work through the numbers with someone who can model different scenarios based on your income, your other assets, and your timeline. If you're buying after Budget night, make sure you understand whether the property is classified as a new build or established, and what that means for your deductions from July 2027. If you already own investment property, consider how a new purchase interacts with your existing portfolio, particularly if you're planning to offset losses across multiple properties.

If you're thinking about refinancing an existing investment loan, the new rules don't change the tax treatment of properties you already own, but they may influence whether it makes sense to pull equity out to fund another purchase, and if so, what type of property you target next. We work through those scenarios regularly and can show you what your position looks like under different structures before you make a decision.

Negative gearing is one lever in a broader property investment strategy. It can reduce your tax bill and make holding costs more manageable during the early years, but it's not a substitute for buying a property that performs well on its own fundamentals. If you're not sure how the recent changes affect your situation, or you want to model what your cash flow and tax position will look like under the new rules, call one of our team or book an appointment at a time that works for you.

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