Australian homeowners could still access negative gearing tax deductions under the Albanese government’s housing tax reforms through a carve-out tied to former principal places of residence, prompting debate among property investors, mortgage brokers and tax commentators.
The 2026 federal budget changes restrict negative gearing for established homes purchased as investment properties after 12 May 2026. Investors buying newly built homes remain exempt, while existing investment properties are grandfathered under current rules.
However, a report by Michael Read in the Australian Financial Review has highlighted that homeowners who already own a property as their principal place of residence before that date may still be able to access the old negative gearing arrangements if the property is later converted into a rental.
The policy distinction has triggered discussion, particularly among homeowners considering whether to retain an existing home as an investment property when upgrading.
Under Australia’s current negative gearing system, investors can deduct rental losses against their taxable income when property expenses exceed rental income. Those expenses commonly include mortgage interest, maintenance costs, council rates and agent fees.
The budget reforms are aimed at reducing investor demand for established homes and improving housing affordability for first-home buyers, while continuing to support construction activity through exemptions for new builds.
Questions have emerged over how much the principal-place-of-residence carve-out could weaken the practical impact of the policy.
One investor questioned whether many homeowners would actually benefit from the arrangement given the structure of most owner-occupier loans.
“You can’t refinance a property to make higher loan deductible unless additional loan is for home improvement & most PPoRs require principal repayment on original loan so hardly any existing loans would provide NG when switching the PPoR to IP,” the commentator wrote.
The debate centres on how loan deductibility works under Australian tax law once a home changes from owner-occupied status to an investment property.
Tax deductibility is generally linked to the purpose of borrowed funds rather than the property itself. Mortgage specialists say this creates a distinction between original home loans and later refinanced borrowings.
Another commentator argued that some borrowers could legally restructure their lending arrangements before converting a home into an investment property.
“There are quite a few ways to do this and still make your loan deductible.
It’s not really as hard as you think.
Most common way is to buy new property, then refinance and use new equity to fund renos on old PPOR (now new IP).
Keep IP sub account as IO, keep your new PPOR loan as P & I.
Existing balance before new purchase, plus refinanced balance for renos is your deductible loan base.”
Mortgage brokers say one commonly discussed strategy involves splitting loans into separate sub-accounts before changing the use of the property.
Under a loan split structure, borrowers may separate portions of debt linked to different purposes. For example, an owner-occupier loan may retain a principal-and-interest component for the new family home while a separate interest-only investment loan is attached to funds used for renovations or investment-related expenses on the former residence.
Interest-only loans are frequently used by investors because repayments initially cover only the interest charged by the lender rather than reducing the loan principal. This can improve short-term cash flow and preserve the deductible portion of the debt, though borrowers generally face higher interest rates and greater long-term costs.
Property finance specialists caution that refinancing does not automatically make a loan tax deductible. The Australian Taxation Office generally assesses how borrowed money is used, and mixed-purpose loans can create accounting complications.
Banks may also reassess borrowers under investment lending criteria once a property becomes a rental, often applying different serviceability rules and interest rates.
The debate comes as Australia’s housing market remains under pressure from affordability concerns, rental shortages and elevated mortgage costs following years of rapid price growth and higher interest rates.
Some market participants argue the reforms could discourage speculative investment activity in established housing stock. Others warn that a reduction in investor participation may tighten rental supply if fewer homes are made available to tenants.
Another commentator on X noted that rising holding costs could still discourage many homeowners from retaining former residences as rental properties.
“Gross rental incomes are around 3%, well below mortgage interest rates. Add to that state land taxes, agent fees and maintenance and anyone with a home mortgage less than 10y would likely be losing money if the house was rented. So they could put it on the rental market & buy new”
The practical impact of the negative gearing carve-out is likely to depend on borrower behaviour, lender policies and future guidance from tax professionals once the July 2027 reforms take effect.
Disclaimer: Homeowners considering refinancing, loan restructuring, loan splits, redraw facilities or converting a principal place of residence into an investment property should seek independent legal, financial and accounting advice before making any decisions. This article is general information only and does not constitute financial or tax advice
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