Commercial Property Escaped the 2027 Reforms: What Investors Should Know

The 2026-27 Budget's negative-gearing reform applies to residential property only. Commercial property offices, retail, industrial, warehouses, medical suites and similar is explicitly untouched. For investors looking at the post-2027 landscape, this carve-out creates a structural advantage for commercial holdings that did not previously exist. This article explains what changed, what didn't, and the opportunities and pitfalls for investors considering a residential-to-commercial pivot.

Scope of the reform: residential only

Treasury's explanatory material is unambiguous: the negative-gearing reform applies to "residential investment property." Commercial property is excluded. Shares, ETFs, business interests, commercial real estate trusts and private credit are similarly excluded from the negative-gearing changes (though they are subject to the general CGT regime changes).

The policy rationale: the Government's stated goal is housing supply. Restricting tax benefits for residential investment is meant to free up housing for owner-occupiers and first-home buyers. Commercial property has no such policy connection restricting it would achieve nothing for housing affordability.

How commercial property continues to be taxed

Commercial investment property continues under the existing tax framework:

• Rental income (typically with GST) is assessable income
• Mortgage interest, council rates, insurance, repairs and management fees are deductible
• Where deductions exceed income, the loss offsets all other income including wages
• Depreciation (capital works and plant) continues under standard rules
• CGT applies on disposal under the new CPI indexation regime with 30% minimum tax (replacing the 50% discount from 1 July 2027)

Critically, there is no $-limit on losses, no carry-forward conversion, and no requirement that losses only offset commercial income. The pre-12 May 2026 negative-gearing rules continue to apply to commercial property indefinitely.

The opportunity: structural tax advantage

The reform has created a tax wedge between residential and commercial property that did not previously exist. An investor on a 45% marginal rate generating a $20,000 annual loss receives:

• Commercial property: immediate $9,000 wage offset, annually
• Post-2027 established residential: $0 immediate offset, $9,000 deferred to carry-forward

Over a 10-year hold, the cash-flow difference can exceed $50,000 in present value. For investors deciding between residential and commercial within the same risk budget, this gap meaningfully shifts the calculus toward commercial.

The realities: yields, vacancy, capital intensity

Commercial property is not residential property with a tax benefit attached. The structural differences are significant:

• Higher gross yields (typically 6-9%): usually positive cash flow rather than negatively geared from year one
• Longer vacancies (3-12 months not unusual): versus 1-4 weeks for residential
• Specialised tenants: harder to replace; tenant default can be catastrophic for cash flow
• GST registration: typically required, with annual BAS obligations
• Capital improvements at tenant turnover: often substantial (new fitout, base building upgrades)
• Higher entry barriers: larger deposits (30-40%), commercial lending rates 1-1.5% above residential
• Tighter exit liquidity: commercial property sells in months, not weeks

Transition strategies for residential investors

For an investor with a portfolio of grandfathered residential properties, no urgent shift to commercial is required grandfathering preserves the existing tax position. The residential-to-commercial conversation is most relevant for:

• Investors with capital to deploy in the next 1-3 years
• SMSF trustees diversifying away from residential
• Investors who have already sold residential holdings and are redeploying
• Family trusts considering longer-term tax-efficient holdings

For tactical transitions, consider commercial real estate investment trusts (A-REITs) as a liquid commercial exposure. Direct commercial property remains higher returning but with substantially more management overhead. For analysis of related strategies, see our pieces on SMSFs and the reforms and strategy for existing landlords.

What counts as "commercial" for tax purposes

The residential/commercial line is generally clear but has some grey areas:

• Clearly commercial: offices, retail shops, industrial sheds, warehouses, medical suites, professional rooms
• Clearly residential: houses, apartments, units, townhouses, duplexes leased to private tenants
• Mixed-use buildings: apportionment based on floor area used for each purpose
• Short-stay accommodation (Airbnb, hotels): generally treated as commercial if operated as a commercial business
• Student housing and purpose-built rental (BTR): typically residential; specific advice needed
• Boarding houses: often residential but with commercial elements; varies by structure