Is There a "Sweet Spot" Loan Size Under the New Negative Gearing Rules?

Negative gearing changed under Australian law in 2026 — and for established properties bought after Budget night, the old assumption that "the tax refund covers the shortfall" no longer holds the way it used to. We ran a full, realistic case study to find out whether there's a genuine "sweet spot" loan size that still gets the most out of what negative gearing allows — and whether restructuring existing loans can claw back some of what's been lost.

What actually changed (and what didn't)

As part of the 2026–27 Federal Budget, the government passed the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026, which reforms negative gearing for established residential property. This is now law, not a proposal. Here's what it actually means:

• Properties held (or under contract) before 7:30pm AEST on 12 May 2026 are fully grandfathered — negative gearing continues under the old rules indefinitely, for as long as you hold the property.

• Established properties purchased after that date: from 1 July 2027, any net rental loss can no longer be offset against your salary or other personal income. It can only be offset against rental income (from this or other residential properties) or a future capital gain when the property is sold. Unused losses carry forward indefinitely.

• New builds are exempt entirely — a property that's never been lived in or sold before keeps full access to negative gearing against all income, and the existing 50% CGT discount, under the old rules.

• Separately, the 50% CGT discount is being replaced with cost base indexation plus a 30% minimum tax rate on gains accruing after 1 July 2027 (gains that accrued before that date keep the old 50% discount).

In other words: the interest, rates, maintenance, and depreciation on an established investment property are all still 100% legitimate deductions — nothing about what you can claim has changed. What's changed is when that deduction actually helps you, if your property is loss-making.

The case study

A couple, each earning $100,000 a year (both with private health cover, two kids, combined household income $200,000), is buying an established $800,000 investment property at 80% LVR — an investment loan of $640,000 over 30 years at 6.50% variable. The property rents for $700 a week. They also hold their own home, with a $600,000 loan over 20 years at 6.00%. There's no strata (standalone house), just council/water rates, and maintenance running at roughly $250 a month. This is an established property purchased after Budget night, so it falls under the new rules from 1 July 2027.

Running the numbers on Year 1:

Item	Annual amount
Rental income ($700/week)	$36,400
Loan interest (Year 1, $640k @ 6.50%)	$41,389
Rates, maintenance, insurance, depreciation*	$10,600
Net rental result	−$15,589 (loss)

*Standard deduction assumptions: ~$3,000 council/water rates, $3,000 maintenance (as given), ~$1,100 landlord insurance, ~$3,500 conservative depreciation. A quantity surveyor's report would refine the depreciation figure precisely — established properties typically claim less than new builds here.

Under the old rules, that $15,589 loss would have reduced the couple's combined taxable income, saving roughly $4,989 in tax immediately (at their 32% combined marginal rate, including Medicare levy). Under the new rules, that immediate saving is $0 — the loss simply carries forward against future rental income or the eventual capital gain on sale. The couple still has to find the same cash shortfall out of pocket either way; what's gone is the tax refund that used to help cover it.

Is there a "sweet spot" loan size?

Since excess losses no longer produce an immediate benefit, it's worth asking: what loan size would keep this property's deductions roughly equal to its rental income — large enough to legitimately shelter all the rental income from tax, but not so large that it generates a loss with no immediate value?

Working backwards from the rental income and the other deductions: $36,400 rental income, less $10,600 in non-interest deductions, leaves an "interest budget" of $25,800 a year. At 6.50%, that corresponds to a loan of roughly $396,923 — the point at which this property is exactly neutrally geared.

The actual loan required to settle this purchase at 80% LVR is $640,000 — about $243,000 more than the neutral-gearing sweet spot. That excess borrowing generates roughly $15,800 a year in interest that, under the new rules, doesn't produce any current-year tax benefit at all. It's not wasted — it still reduces the couple's eventual capital gains tax bill, or offsets future rental profit as the loan amortises and rent grows — but it's deferred value, not cash in hand this year.

This is genuinely useful to know before settlement, not after: a bigger deposit (a smaller loan, closer to the sweet spot) means less "wasted" negative gearing capacity sitting idle as a deferred loss, and more of that same cash instead available to attack non-deductible debt from day one — which brings us to the next question.

How the carried-forward loss actually plays out

The carried-forward loss doesn't disappear — it just waits. As rent grows and the loan balance (and therefore the interest bill) gradually reduces, the annual loss shrinks and the carried-forward balance keeps growing until the property eventually turns cash-flow positive or is sold.

Assuming modest 3% annual rent growth, by year 5 this property has accumulated roughly $64,000 in carried-forward losses — all of which remains available to offset either future rental profit from this (or another) residential property, or the capital gain when it's eventually sold. It's real value, just not liquid, and not available to reduce this year's PAYG tax the way it would have been under the old rules.

Can the client still "re-weight" their loans to stay tax-effective?

Yes — and this part of the strategy hasn't actually changed, because it was never really about negative gearing in the first place. Interest deductibility depends on the purpose of a loan, not which property secures it or how large the loan is. That means the classic debt recycling principle still applies in full: always direct spare cash flow toward non-deductible debt (the home loan) before extra-repaying deductible debt (the investment loan).

If anything, the new rules make this more clearly correct than before, not less. Here's why: paying extra off the OO loan saves 6.00% interest, guaranteed, completely tax-free, every time. Paying extra off the investment loan only reduces future deductible interest — and since this property is already generating more loss than the couple can currently use, reducing that interest further has no current tax cost or benefit at all under the new rules. It just shrinks a deduction pool they weren't able to use immediately anyway.

Modelling an extra $500 a month in spare cash flow over 5 years: directed to the OO loan, it saves roughly $4,885 in guaranteed, tax-free interest. Directed to the investment loan instead, it reduces interest that wasn't delivering any current tax benefit anyway — a net advantage of effectively $0 in this couple's situation. The practical instruction for this client is simple: keep the investment loan on minimum repayments (or interest-only, if suitable), and send every spare dollar at the home loan instead.

The practical takeaways

• Check the purchase date against 7:30pm AEST, 12 May 2026. If contracts were exchanged before then, none of this applies — the property is grandfathered under the old rules for as long as it's held.

• Consider whether a new build changes the equation. A new or near-new property keeps full negative gearing against salary and the 50% CGT discount — worth weighing against an established property's usually lower purchase price and existing rental history.

• A bigger deposit isn't automatically wrong under the new rules. Borrowing closer to the neutral-gearing point, and using the difference to reduce non-deductible debt, can be more tax-effective in the short term than maximising leverage on the investment loan the way clients often did previously.

• Debt recycling still works exactly as before. Direct surplus cash flow to the home loan first, keep the investment loan lean and untouched, and let the carried-forward loss do its job eventually against rental profit or the sale.

Thinking about an investment purchase under the new rules?

This article is general information only and does not take into account your personal financial situation, needs, or objectives. It is not financial, tax, or legal advice. The negative gearing and CGT changes described are based on the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 as passed and current ATO guidance at time of writing; tax treatment depends on individual circumstances. Figures are illustrative estimates using the scenario and assumptions described, including estimated (not quoted) rates, insurance, and depreciation figures — a quantity surveyor's report and your accountant's advice will refine these for your actual situation. Please seek independent financial, tax, and legal advice before making decisions about property investment or loan structuring. Ian Freeman is a Credit Representative (Credit Representative Number 439731) of Finsure Finance & Insurance Pty Ltd, Australian Credit Licence 384704.