How to Turn Your Existing Home Into an Investment Property — And Still Qualify for Negative Gearing
Updated: Aug 17
Following the 2026 Federal Budget, a strategy that was already gaining attention has become significantly more relevant. Homeowners who already own their property — and purchased it before Budget night on 12 May 2026 — may be sitting on an opportunity to retain their existing home as a negatively geared investment while purchasing a new property to live in. Here's how it works, why it's worth understanding, and what to watch out for.
⚠ Important disclaimer
This strategy involves tax law, lending policy, and personal financial planning — and the interaction between them is complex. This article is general information only. You should seek advice from a qualified tax accountant and mortgage broker before making any decisions. Individual circumstances vary significantly and the numbers must be modelled for your specific situation.
The Strategy in Plain English
The concept is straightforward, even if the execution requires care:
You currently own your home — your Principal Place of Residence (PPOR) — with an existing mortgage, or possibly mortgage-free
Rather than selling your home to fund a new purchase, you retain it and convert it to a rental investment property
You then borrow to purchase a new property that becomes your new home
Because your existing home was purchased before Budget night (12 May 2026), it is grandfathered — the negative gearing changes do not apply, and rental losses can still be offset against your personal income
Why the grandfathering matters enormously right now
From 1 July 2027, established residential properties purchased after Budget night lose access to negative gearing against personal income. But properties already held — including your current home — are grandfathered indefinitely. Converting your existing PPOR to an investment property preserves access to negative gearing on that property, a right that can no longer be obtained on newly purchased established properties.
How the Numbers Can Work
Let's look at a simplified illustrative example to make this concrete.
Item | Illustrative example |
|---|---|
Current home value | $750,000 |
Existing mortgage balance | $300,000 |
Estimated weekly rent | $650/week (~$33,800/year) |
Interest on existing mortgage (at 6.5%) | ~$19,500/year |
Other deductible costs (rates, insurance, management) | ~$6,000/year |
Net rental position | Positive (rental income exceeds costs) |
New home loan required | $700,000+ (for new PPOR) |
Illustrative figures only. Actual tax outcomes depend on your income, loan structure, deductible expenses, and depreciation claims. Seek advice from a qualified accountant.
In many cases where a homeowner has had their property for several years and has meaningful equity, converting to a rental produces a positively geared outcome on the existing property — generating rental income that helps service the new home loan. The negative gearing benefit comes from the interaction of the loan interest deduction with your total tax position, which your accountant can model specifically for you.
The Loan Structure Is Critical
This is where a broker becomes essential — not just helpful. The way your loans are structured when you make this transition has a significant impact on how much interest is tax deductible and how much is not.
⚠ The most common and costly mistake
Many homeowners instinctively redraw from their existing home loan to help fund the deposit on the new property. This is almost always the wrong approach. When you redraw funds that were originally used to pay down a home loan, the redrawn funds are used for a private purpose — buying a new home to live in — which means the interest on the redrawn portion is not tax deductible. You end up with a mixed-purpose loan that is messy, complicated to manage, and significantly reduces the tax benefit of the strategy. The loan structure should be set up correctly from the beginning, not adjusted after the fact.
The right approach involves:
Keeping the existing loan on the investment property separate and untouched where possible
Using equity via a new facility — such as a separate loan split or line of credit against the investment property — for the deposit on the new home, structured correctly to preserve deductibility
Ensuring the new home loan is a completely separate facility
Documenting the purpose of every loan component clearly at the outset
Other Important Considerations
Capital Gains Tax on the existing home
When a property transitions from your PPOR to an investment property, the CGT clock starts from the date you vacate it, not the original purchase date. There is a six-year rule that allows you to continue treating the property as your PPOR for CGT purposes for up to six years while it is rented — but this needs to be understood carefully, particularly given the 2026 Budget's changes to the CGT discount.
Rental income is assessable
All rental income from the converted property must be declared. If the property is positively geared, this will increase your taxable income. Your accountant needs to model the total tax impact — including the depreciation schedule for the investment property, which can significantly reduce your taxable rental income.
Borrowing capacity for the new home loan
Lenders will assess whether you can service both the existing investment loan and the new home loan. Rental income from the investment property is typically accepted at 70–80% by lenders as part of the serviceability calculation, which helps — but you need to confirm your borrowing position before committing to this strategy.
"For eligible homeowners, this strategy offers something the Budget has now made harder to replicate: a grandfathered investment property with full negative gearing access, funded by equity that was already sitting in your home."
General information only. Tax outcomes are highly individual and depend on your specific circumstances, loan structure, and applicable legislation. This is not financial or tax advice. Please consult a qualified accountant and mortgage broker before proceeding. Credit Representative Number 439731.
Thinking about converting your home to an investment?
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