Negative Gearing: What Caulfield South Investors Should Know

Negative gearing remains one of the most talked-about features of property investment in Australia, but the rules changed significantly in mid-2026.

Investors in Caulfield South who bought established property before 12 May 2026 can continue to claim rental losses against their salary or other income indefinitely. Those purchasing after that date face tighter limits from the 2027-28 income year, with losses from established dwellings only deductible against other residential property income. The change doesn't eliminate negative gearing, but it does reshape the way investors structure their portfolios and the assumptions they make about tax offsets during the holding period.

How Negative Gearing Works Under the Current Framework

Negative gearing applies when your rental property expenses, including loan interest, exceed the rental income you receive. The shortfall can be claimed as a tax deduction, reducing the amount of income tax you pay in that financial year.

For properties held at 7:30pm AEST on 12 May 2026, or those under contract at that time, losses can still be deducted against all types of income, including wages. The same treatment applies to eligible new builds acquired after that date. Established properties purchased after 12 May 2026, however, are subject to a quarantine from the 2027-28 income year, meaning losses can only offset income from other residential properties or residential capital gains. Any unused losses carry forward to future years and remain available to offset residential property income when it arises.

Consider an investor who purchases a two-bedroom apartment in Caulfield South in September 2026. Interest costs are $28,000 for the year, and other deductible expenses total $8,000. Rental income comes to $24,000. The property runs at a loss of $12,000. Under the new rules applying from 1 July 2027, that loss cannot be claimed against the investor's salary. It can, however, be used to offset rental profits from another property or a capital gain on a residential property in the same or a future tax year.

What Counts as an Eligible New Build

An eligible new build is a dwelling constructed on previously vacant land or a development where the number of dwellings increases compared to what existed before.

A knock-down rebuild that replaces one house with one house does not qualify, even if the new dwelling is larger or more modern. Substantial renovations also fall outside the definition. A development that replaces a single dwelling with two townhouses would qualify, as the dwelling count has increased. If a new build is occupied for more than 12 months before being sold to a subsequent investor, that next purchaser loses access to the new build exemption and is treated as buying an established property for negative gearing purposes.

This distinction matters in Caulfield South, where older single dwellings on larger blocks are sometimes subdivided and replaced with dual occupancy or townhouse developments. Investors considering off-the-plan purchases or new townhouse developments should confirm with their legal and tax advisers whether the property meets the eligibility criteria before settlement.

Interest-Only Loans and Their Role in Property Investment Strategy

Many investors select interest-only investment loan structures to maximise deductible interest and maintain cash flow during the holding period.

Under an interest-only arrangement, the borrower pays only the interest component of the loan each month, with the principal balance remaining unchanged. This keeps repayments lower than a principal-and-interest loan and, because the loan balance doesn't reduce, the amount of deductible interest remains higher throughout the interest-only term. Interest-only periods typically run for one to five years, after which the loan either reverts to principal and interest or can be renewed if the lender's criteria are met.

From a regulatory perspective, lenders apply higher risk weightings to interest-only investor loans under APRA's Prudential Standard APS 112, especially where the loan-to-value ratio exceeds 80 per cent. This can translate to higher interest rates and stricter serviceability requirements. Borrowers should also be prepared for higher repayments once the interest-only period ends and the loan converts to principal and interest, as the remaining term is shorter and the principal must now be repaid.

Tax Deductions Beyond Interest

Interest is usually the largest single deduction for a negatively geared property, but it's not the only one.

Ongoing holding costs such as council rates, landlord insurance, property management fees, strata levies and repairs are all deductible during the period the property is rented or genuinely available for rent. Depreciation on the building and certain fixtures can also be claimed, although for properties purchased after 9 May 2017, depreciation on second-hand plant and equipment is no longer deductible. Only the original purchaser of a new build can claim those depreciation deductions on items such as ovens, blinds and carpets.

In Caulfield South, where body corporate fees for older apartment buildings or renovated conversions can reach several thousand dollars per year, these costs add up and are fully deductible. Costs incurred to improve the property, rather than repair it, are generally treated as capital expenses and added to the cost base for capital gains tax purposes rather than claimed as an immediate deduction.

Deposit Requirements and Lenders Mortgage Insurance

Most lenders require a minimum 10 per cent deposit for an investment loan, with some preferring 20 per cent to avoid Lenders Mortgage Insurance.

LMI is a one-off premium charged to the borrower when the loan-to-value ratio exceeds 80 per cent. The premium is calculated based on the loan amount and LVR, and can add several thousand dollars to the upfront costs. While the premium can sometimes be capitalised into the loan amount, it's important to remember that it protects the lender, not the borrower. Some states also charge stamp duty on the LMI premium.

Investors who already own property may be able to access equity in their existing home to fund part or all of the deposit for the Caulfield South investment. This approach is sometimes referred to as leveraging equity. A refinance of the existing loan may be required to access that equity, and the borrowed funds must be used for investment purposes if the interest is to remain deductible.

How Debt-to-Income Limits Affect Investor Borrowing Capacity

From 1 February 2026, lenders regulated by APRA have been subject to a limit on high debt-to-income lending.

Each lender may approve up to 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times their gross annual income or higher. The limit applies separately to investor and owner-occupier portfolios. A borrower earning $120,000 per year would reach the six-times threshold with total borrowing of $720,000 across all loans. Lenders retain discretion below that threshold, and some may apply stricter internal limits.

The debt-to-income measure takes into account all loans in the borrower's name, not just the loan being applied for. This is relevant for Caulfield South investors who already hold an owner-occupied mortgage or another investment loan, as the combined debt affects both serviceability and positioning against the DTI benchmark. Lenders also continue to assess new loans using a serviceability buffer of at least 3.0 percentage points above the loan product rate.

Capital Gains Tax Treatment from 1 July 2027

From 1 July 2027, the way capital gains on investment properties are taxed will change for gains accruing after that date.

Instead of the current 50 per cent discount on gains for assets held more than 12 months, investors will index the cost base of the property in line with inflation and pay tax only on real gains above inflation. A minimum tax rate of 30 per cent will apply to the indexed gain, regardless of the investor's marginal tax rate, unless the investor is receiving certain government payments such as the Age Pension or JobSeeker in the year of sale.

For properties owned before 1 July 2027 and sold after that date, the gain is split. The portion accruing before 1 July 2027 is taxed under the old 50 per cent discount rule, and the portion accruing after that date is taxed under the new indexed system. Investors can choose between obtaining a market valuation as at 1 July 2027 or applying an ATO apportionment formula. For eligible new builds, investors can choose between the old discount method and the new indexed method at the time of disposal, selecting whichever results in the lower tax.

Why Location Still Matters in Caulfield South

Caulfield South sits within the Glen Eira local government area and is servoured by Caulfield and Glenhuntly railway stations, both on the Frankston and Cranbourne-Pakenham lines.

The suburb attracts a mix of young professionals, families and students due to its proximity to Monash University's Caulfield campus, which is located on the suburb's northern boundary. The Caulfield Racecourse and adjacent parklands provide open space, and the retail and dining precinct along Glenhuntly Road provides local amenity. The area also falls within the catchment for several well-regarded state primary and secondary schools.

From an investment perspective, proximity to public transport, the university and established infrastructure supports rental demand. Vacancy rates in the broader Glen Eira area have remained relatively low in recent years, although individual property performance will always depend on presentation, price positioning and property management. Investors should request recent rental appraisals and comparable leasing data before committing to a purchase.

Variable Rate or Fixed Rate for Investment Loans

Investors can choose between variable rate, fixed rate or split loan structures when financing a rental property.

A variable rate investment loan allows the interest rate to move in line with the lender's pricing, which in turn responds to Reserve Bank policy and funding costs. Repayments can rise or fall, and most variable rate products include features such as offset accounts and the ability to make extra repayments without penalty. A fixed rate investment loan locks in the interest rate for a set period, typically one to five years, providing certainty over repayments during that period. Fixed rate loans generally do not include offset accounts and may impose break costs if the loan is repaid early or refinanced before the fixed term ends.

A split loan divides the borrowing between a variable portion and a fixed portion, allowing the investor to benefit from offset and flexibility on part of the loan while maintaining rate certainty on the remainder. There is no universal preference, and the choice should reflect the investor's cash flow needs, risk tolerance and view on future rate movements. Investors considering a fixed rate product should be aware of the restrictions that apply during the fixed term.

Call one of our team or book an appointment at a time that works for you to discuss your investment loan options and how the current rules apply to your circumstances.

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