The May budget switched off negative gearing for the established home and left it fully intact for the shop beneath it. On what that quietly does to the investment case.
The headlines the morning after the budget were near enough unanimous: negative gearing was finished. It is a good headline. It is also wrong. Negative gearing was not abolished in May — it was redrawn, along a line that most of the coverage walked straight past. The line runs between residential and commercial property, and once you see it, a good deal of the investment logic in this part of Sydney rearranges itself.
Let me set out precisely what changed, because the precision is the whole point.
| 3.1% Sydney residential gross yield — the lowest of any capital city (Cotality) | 5.25 –7.5% Sydney commercial yields across the sectors (broker-observed) | 1 Jul 2027 Established-residential change begins — commercial unaffected |
What the budget did to residential
From 1 July 2027, an investor who buys an established residential property after 7:30pm on budget night — 12 May 2026 — will no longer be able to deduct the rental loss against their salary or other income. The loss is instead quarantined: it can be offset only against residential rental income or the capital gain when the property is eventually sold, with any excess carried forward indefinitely. The measures were announced in the 2026–27 budget and are still moving through consultation; they are proposed, not yet law.
Two carve-outs matter. Anyone already holding a negatively geared property at 7:30pm on budget night — including those who had exchanged but not settled — is grandfathered, and continues under the old rules until they sell. And new builds are exempt entirely: buy a newly constructed dwelling and you keep both negative gearing against your full income and the choice of capital gains treatment. The change is aimed squarely at the established home bought from budget night onward.
It is worth being fair about what this is and isn’t. The deduction is deferred, not destroyed — the loss survives to offset future rental income or the eventual gain. But deferred is not the same as useful. A tax saving you might realise in a decade does nothing to help you fund the shortfall this year, and it is worth less in today’s money besides.
What it did to commercial
Nothing.
Commercial property was left entirely alone. An investor who negatively gears a shop, a warehouse, a suburban office or a medical suite can still deduct that loss against their salary, their business income, anything — exactly as they could the day before the budget. The professional commentary is unusually blunt on the point: the accounting bodies and the major firms all state flatly that the changes apply to residential property only, and that commercial keeps the existing arrangements. Ray White Commercial went so far as to publish a note to its investors on what the changes mean for them, and the short answer was: you are unaffected.
The budget did not end negative gearing. It chose which landlord could keep it.
Why this is a bigger deal than it looks
Here is the part that makes me sit up. Negative gearing was never incidental to the residential model — it was structural. A Sydney house returns a gross rental yield of about 3.1% on Cotality’s early-2026 figures, the lowest of any capital city in the country. Funded at investor rates in the order of 6 to 6.8%, with the RBA cash rate at 4.35%, that property loses money every week by design. The whole arrangement only ever made sense because the tax system stood behind the loss — you carried the weekly shortfall, deducted it against your salary, and waited for capital growth to settle the account.
Take away the salary deduction and you have not tweaked the residential model — you have removed the beam it was resting on. The established home on a 3% yield still loses money each week; the difference is that the investor now wears more of that loss themselves, in cash, today. Treasury’s own figures make it concrete: on a one-million-dollar property running a rental loss of around $14,810 a year, an investor earning $210,000 currently saves close to $6,961 in tax annually. Under the new rules, that yearly saving is gone.
Commercial sits on the other side of the line for a reason that compounds the advantage. At yields of roughly 5.5 to 7.5%, a well-bought commercial property frequently does not run at a loss at all — it pays its own way from the first month. And in the cases where it is geared into a loss, the deduction still works in full. So the budget has done something quietly pointed: it has withdrawn tax support from precisely the asset that was already the weaker income proposition, and left it untouched on the stronger one.
The honest qualifications
I am not going to oversell this, because the case doesn’t need it. The change is not retrospective — if you already own, nothing moves. New builds keep the old treatment, so the residential incentive hasn’t vanished, it has been redirected toward new supply, which is rather the point of it. And there is a second-order effect worth flagging for anyone still buying established stock: because many lenders factor expected negative gearing benefits into how much they will lend, removing the deduction can also trim borrowing capacity, not just after-tax cash flow. The Commonwealth Bank’s modelling has house prices settling around 3% lower than they otherwise would have been — a repricing, not a rout.
None of this makes residential a poor asset. Sydney land remains scarce and its long-run growth record is formidable. What has changed is narrower and, I think, more consequential than the price forecasts suggest: the reason a great many people bought established residential in the first place has been quietly withdrawn.
What I take from it
For anyone who already owns, this is a non-event — hold your grandfathered position and carry on. For anyone buying today, the calculus has shifted. The investor weighing an established home against a commercial premises is now choosing between an asset whose central tax advantage is being switched off and one where it remains fully in place. That is not a small thing to have on one side of the ledger and not the other.
For anyone buying an established home today, the tax system has quietly stopped helping — and, in relative terms, started pointing downstairs.
I have said before that commercial suits a particular temperament rather than everyone. That remains true. But the budget has widened the gap between the two markets by hand, and it has done so in commercial’s favour. When the government redraws a line through your industry, it pays to notice which side of it you are standing on.
— Alan
The budget measures described here were announced in the 2026–27 federal budget to take effect from 1 July 2027 and remain proposed, subject to consultation and legislation; details may change. Figures are drawn from named sources including Cotality, the Reserve Bank of Australia, Treasury, the Commonwealth Bank, Ray White Commercial and the major accounting bodies. This is general market commentary, not financial, tax or legal advice; seek advice specific to your circumstances before acting.
