Could debt recycling become more important under the new negative gearing rules?

As you may have heard, changes to Australia’s negative gearing rules are coming into effect from 1 July 2027.

Under the new rules, investors purchasing an established residential property after 7:30pm on 12 May 2026 will generally no longer be able to use a rental loss from that property to reduce their salary or other non-residential income. Instead, those losses will generally be able to be offset against other residential property income and capital gains.

The rules for existing properties purchased before 12 May 2026 are grandfathered, and newly constructed properties will continue to have access to negative gearing.

This change means it may be worthwhile reviewing not just the property investment itself, but also how your overall debt is structured.

Where debt recycling may help

Debt recycling is a strategy where you use available cash to reduce your non-deductible home loan and then borrow an equivalent amount for an investment purpose.

For example:

Before debt recycling

• Home loan: $800,000
• Investment loan: $400,000
• Available savings: $100,000

Rather than simply leaving the $100,000 in a bank account, a debt recycling strategy could involve:

1. Using the $100,000 cash to reduce the home loan from $800,000 to $700,000.
2. Borrowing $100,000 against the home for an investment purpose, such as purchasing a diversified share portfolio.
3. The home loan has effectively been converted from $800,000 of non-deductible debt to $700,000 of home debt plus $100,000 of investment debt.
4. Provided the borrowed funds are used solely for the investment, the interest on the investment portion may generally be tax deductible.

A simple example

Suppose the $100,000 investment loan incurs interest of 6%.

That’s approximately $6,000 of investment interest per year.

If the investment produces $3,000 of assessable income, the investment may have a net taxable loss of approximately $3,000.

Subject to the applicable tax rules, that investment loss may be available to reduce other taxable income.

The important distinction is that the tax deduction is associated with the purpose of the investment borrowing. The strategy does not turn an established residential property into a negatively geared property for tax purposes.

Instead, it can allow an investor to progressively reduce their non-deductible home loan while building deductible investment debt elsewhere.

What does this mean if you are considering another property?

If you are considering purchasing an established investment property after the new rules commence, we should look at the overall structure rather than simply asking whether the property will be negatively geared.

There may be several alternatives to consider, including:

• purchasing a qualifying new-build property;
• debt recycling into shares or other appropriate investments;
• retaining existing grandfathered properties;
• paying down non-deductible home debt more aggressively; or
• combining property and investment strategies based on your overall objectives.

Debt recycling is not suitable for everyone. It involves borrowing and investment risk, and the investment needs to be considered on its own merits rather than simply for the potential tax deduction.

If you are considering purchasing another investment property or have a significant home loan, please contact us before making any changes to your lending structure. We can review your circumstances and determine whether debt recycling or another strategy may be appropriate for you.

Important Information

This case study is for illustrative and educational purposes only and does not constitute personal financial or tax advice. The figures and circumstances are hypothetical. Tax outcomes, including the deductibility of interest, depend on how borrowed funds are used and the individual’s circumstances and applicable Australian tax law. Investment returns are not guaranteed and investment values can fall as well as rise. Any debt-recycling strategy should be considered with appropriately qualified financial and tax professionals and tailored to the client’s circumstances.