The 2026 Budget's decision to restrict negative gearing to new build property investment in Australia from 1 July 2027 has created a fork in the road for property investors. If you buy an established residential property now, you're buying something that won't qualify for full negative gearing in 12 months. If you pursue a house and land package, off-the-plan apartment, or a land-and-build project, negative gearing stays available indefinitely. That's not a minor tax footnote. For a high-income earner at the 47% marginal rate, the ability to offset rental losses against salary is worth real money each year. And it goes away for established property.

The decision isn't as simple as "always build." New builds come with their own set of financial complexities - construction loans, holding costs during the build, land tax on vacant land, builder selection risk. This article works through the actual strategic decision: when does building make financial sense, what does the cashflow look like during construction, and how do you model the comparison properly?

The Core Tax Difference Between New Build Property Investment and Established Property

From 1 July 2027, rental losses on established residential properties purchased after Budget Night (12 May 2026) are quarantined. They can only be offset against other residential property rental income or capital gains when you sell. You can't deduct them against your salary.

New residential construction is treated differently. House and land packages, off-the-plan apartments, newly built townhouses - these retain full negative gearing from 1 July 2027 onwards. Rental losses offset salary and other income exactly as they always have. This is deliberate: the government is trying to channel new investor money toward new housing supply rather than existing stock.

For a high-income earner with significant rental losses in a new build's early years - high depreciation, full interest deductions, property management costs - that annual tax saving is substantial. Over a 10-year hold, the difference in after-tax cash position between a negatively geared new build and a quarantined-loss established property can be material. I've run these models for clients and the gap is not trivial.

One important note: shares, ETFs, commercial property, and other non-residential assets are not affected. The quarantining rule applies to residential investment properties only. If your investment thesis involves commercial property or a diversified share portfolio, this change doesn't touch you.

Construction Loan vs Standard Investment Mortgage: The Finance Difference

This is where most investors underestimate the complexity of building. A standard investment loan settles on a completed property - you borrow the full amount, the money goes to the vendor, you start paying interest on the full balance from day one, and rent comes in (if the property is tenanted).

A construction loan works differently. The lender releases funds in progressive drawdowns as the build reaches each stage:

  • Land settlement (often a separate land loan settles first)
  • Slab completion
  • Frame stage
  • Lock-up (roof, windows, doors)
  • Fit-out (internal work)
  • Practical completion

You pay interest only on the amount drawn to that point. Early in the build, when only the land has settled, your loan balance is small and your interest cost is low. As drawdowns progress, the interest cost rises. At practical completion, the construction loan typically converts to a standard investment mortgage.

The crucial gap: during construction, you're paying interest without receiving any rental income. There's no tenant. The property isn't habitable. That interest cost during construction is a holding cost with zero income offset.

This is where building to invest catches people off guard. They model the eventual steady-state (monthly rent, minus interest, minus expenses, equals negative gearing benefit) but don't model the pre-rent holding period properly. For a 12-month build, that's 12 months of interest payments with no rental income. Factor in the land tax position (more on that below) and the build-phase cashflow is genuinely tight.

Interest Deductibility During Construction: The Tax Treatment

Here's a question I get regularly from clients: can I deduct the construction period interest?

The short answer: generally not during the build. Construction period interest on a property being built for rental investment is typically either capitalised into the cost base of the property or treated as borrowing costs that are deducted over five years (or the loan term, whichever is shorter). It's not immediately deductible as a rental expense because there's no income-producing activity during construction - the property isn't available for rent.

Once the property reaches practical completion and is available for rent - even if it's not immediately tenanted - the loan interest becomes fully deductible. The negative gearing position kicks in from the date the property is available for rent, not the date you actually find a tenant.

The specific treatment of your construction interest depends on how the loan is structured, which can vary. This is one of the reasons getting tax advice before signing the build contract matters - the structure of the loan affects the deductibility timeline.

Holding Costs During the Build: Land Tax Is the Hidden Expense

When you settle on a block of land for a house and land package, you're the owner of taxable land. In most Australian states, land tax applies from the day you own the land - there's no exemption for land under construction.

In NSW, land tax is assessed on the unimproved value of the land as at 31 December each year. If you settle on a block in August 2026, and construction takes until June 2027, you'll have a land tax assessment based on the land value at 31 December 2026 - midway through your build. You're paying land tax on an asset that's generating no income. That's a holding cost with zero offset.

Land tax thresholds vary by state. In NSW, the tax-free threshold for the 2025-26 year is just under $1.075 million in aggregate land value across all taxable properties. For most investors with a single investment property, the land value of a suburban block won't trigger land tax on its own. But if you already own investment property and your aggregate land value crosses the threshold, a new land purchase brings the whole portfolio above the threshold and the assessment can be meaningful.

Check your aggregate land tax position before you add a new block. It's frequently overlooked in build-to-invest modelling.

Depreciation: The New Build Advantage

This is the part of the build vs buy analysis that genuinely tilts toward new construction, and it's worth understanding properly.

A new build qualifies for two streams of depreciation:

Division 43 - Building Allowance. At 2.5% per year on the construction cost (not the land value, just the building cost). A new house with a construction cost over several hundred thousand dollars generates a meaningful annual deduction purely from the building structure - no actual cash outflow required. You're claiming wear and tear on bricks and mortar.

Division 40 - Plant and Equipment. Carpets, blinds, ovens, dishwashers, air conditioning units, hot water systems, ceiling fans - all of these depreciate separately from the building structure. Brand new items depreciate faster than old items, so the deduction is higher in early years. And on a new build, you're entitled to the full depreciation schedule on every fitting because you're the first owner.

Here's the key contrast with established property: for residential properties acquired after 9 May 2017, plant and equipment depreciation is only available on items you yourself install. You can't claim depreciation on the carpets or the oven that were already there when you bought the property. A new build sidesteps this restriction entirely - everything is new and you're the original owner.

For a high-income earner at the 47% rate, additional depreciation deductions in the early years of ownership directly reduce the tax bill. The combination of Division 43 and Division 40 can meaningfully increase the rental loss in the first few years of a new build investment, amplifying the negative gearing benefit that's now only available on new construction.

How to Model the Build vs Buy Comparison Properly

I've seen a lot of poor comparisons between building and buying established property. They tend to either overstate the build advantage (ignoring construction period holding costs) or overstate the established property advantage (ignoring the quarantined loss position from 1 July 2027).

A credible comparison needs to model these variables across the same hold period - let's say seven years:

  • Construction period holding costs - interest during the build, land tax, council rates, insurance. These are real cash outflows with no income or immediate tax deduction.
  • Time to first rental income - typically 6-18 months from land settlement to first tenant for a house and land package. That's 6-18 months of holding costs before any rental income arrives.
  • Annual negative gearing tax saving - the rental loss times your marginal rate. For established property acquired after Budget Night, this saving disappears from 1 July 2027. For a new build, it continues.
  • Depreciation schedule - calculate Division 43 and Division 40 separately. New builds consistently generate higher depreciation in years 1-7 than established properties.
  • Stamp duty - some states offer concessions on new builds. In most cases, stamp duty is on the land contract only (rather than land + house), reducing the upfront cost.
  • Eventual CGT outcome - new builds may retain the 50% CGT discount for new residential dwellings under the proposed legislation (as a choice alongside the new indexation regime). Factor this into the exit modelling.

The holding period assumption matters enormously here. A 3-year hold tends to favour established property (you're in the market faster, no construction risk). A 7-10 year hold tends to favour a new build (the depreciation and negative gearing advantages compound, and the CGT treatment is potentially more favourable). The crossover point depends on your specific numbers.

Off-the-Plan Apartments vs House and Land Packages

Both qualify for new build negative gearing. The risk profile is different.

With an off-the-plan apartment, you sign a contract now, pay a deposit, and wait for the developer to complete - often 2-4 years. Your construction loan doesn't start until settlement. The upside: no progressive drawdowns to manage, no builder selection, no construction supervision. The downside: valuation risk at settlement (property values can fall between signing and completion), building quality uncertainty, and lack of control over the timeline. If the developer goes under mid-build, you're an unsecured creditor.

With a house and land package, you buy the land and separately contract a builder. More control, more complexity. You choose the builder, manage the build stages, and deal with any delays or variations. The construction loan drawdown process is your responsibility to manage. But you have more certainty about what you're getting and more influence over the timeline.

My view: for most investors doing their first build-to-invest, a house and land package with a reputable volume builder in an established growth corridor is lower risk than off-the-plan. You can see the land, you've engaged the builder yourself, and the construction timeline is more predictable. Off-the-plan makes more sense for investors who are comfortable with the valuation risk and want the simplicity of a single contract.

The Structural Question: Personal Name or Through an Entity?

For a new build investment, the structure question is the same as any property investment - but the negative gearing restriction adds a nuance worth considering.

Properties held inside an SMSF are explicitly excluded from the quarantining rules. An SMSF can continue to negatively gear established residential properties purchased after Budget Night. If you're accumulating super and your investment strategy includes property, building inside an SMSF (via a limited recourse borrowing arrangement if you need to borrow) is worth considering as part of the overall strategy.

For personal name vs trust: a discretionary trust can hold new build property and access negative gearing. But trust losses can't be distributed to beneficiaries in the way income can - they sit in the trust and are offset against future trust income. If negative gearing is a central part of the investment thesis (high-income earner wants to offset rental losses against salary), personal name typically works better for that specific purpose than a trust structure.

Frequently Asked Questions

Does negative gearing still apply to new builds after 1 July 2027?

Yes. New residential construction - house and land packages, off-the-plan apartments, newly built townhouses - retains full negative gearing from 1 July 2027. You can still offset rental losses against salary and other income. This is the central policy distinction between new builds and established property purchased after Budget Night 2026.

What is a construction loan and how does it work differently from a standard investment loan?

A construction loan releases funds in progressive drawdowns as the build reaches each stage. You pay interest only on the amount drawn, not the full loan. During construction, you're paying interest without receiving any rental income, which creates a holding cost period that doesn't exist with a standard established property purchase. Once construction is complete, the loan typically converts to a standard investment mortgage.

Can I negatively gear a house and land package during the construction period?

Generally not during the build itself - construction period interest is typically capitalised or treated as borrowing costs. Once the property reaches practical completion and is available for rent, full negative gearing applies. The deductibility of construction interest depends on your specific borrowing structure.

What is the land tax position on vacant land during a build?

In most states, land tax applies to investment land from the date of purchase - including vacant land during construction. In NSW, it's assessed on the taxable land value at 31 December each year. Factor land tax into your holding cost modelling from day one of the land settlement, particularly if you already own other investment properties and your aggregate land value is near the threshold.

How do I model the cashflow difference between build vs buy?

A proper comparison needs to account for: the construction period holding costs, land tax during the build, stamp duty differences, the depreciation advantage of a new build, the negative gearing tax saving once tenanted, and the eventual CGT outcome. The total cost of ownership over a 7-10 year hold period is what matters, not just the purchase price comparison.

Are off-the-plan apartments a good alternative to house and land packages?

Both qualify for new build negative gearing. Off-the-plan involves a single contract with the developer but comes with valuation risk at settlement and less control over the timeline. House and land packages give you more control over the build process and typically less valuation risk, with more complexity to manage. For first-time build-to-invest investors, house and land packages with established builders generally carry lower execution risk.

What depreciation advantages does a new build have over an established property?

A new build qualifies for both Division 43 building allowance (2.5% per year on construction costs) and full Division 40 plant and equipment depreciation on all fittings. For established residential properties acquired after 9 May 2017, plant and equipment depreciation is only available on items you personally installed. New builds provide full depreciation entitlement from day one, which meaningfully increases deductible expenses in the early ownership years.

The shift to new-builds-only negative gearing is a structural change that permanently reprices the tax economics of established property investment for high-income earners. That doesn't make established property a bad investment - the fundamentals of location, yield, and capital growth still drive returns. But the after-tax cashflow comparison has changed, and any modelling done before the Budget is now out of date. If you're making a significant property decision in the next 12 months, running the numbers under the new rules is essential - not optional.

Apply for a Strategy Session

Andrew Romano is a Chartered Accountant and SMSF Specialist based in Sydney. He works with high-income individuals, business owners and investors on tax planning, structuring and self-managed super funds.

Sources and references:

Is a New Build the Right Investment Move for Your Situation?

The build vs buy decision depends on your income, existing property portfolio, structure, and timeline. I work through these comparisons with clients regularly - if you want the numbers modelled for your specific situation, book a Strategy Session and we'll work through it together.

Apply for a Strategy Session