How Australia's 2026 Tax Reforms Affect Property Investors and Home Buyers

The 2026-27 Federal Budget fundamentally changes the tax treatment of residential property investment in Australia. From 1 July 2027, negative gearing on established homes is restricted, the 50% capital gains tax discount is replaced by cost base indexation, and a 30% minimum tax applies to net capital gains. These are the most significant changes to property taxation since the introduction of the CGT discount in 1999. This article explains what the changes mean in practice for existing investors, prospective buyers, first home buyers, and renters.

Negative gearing changes explained

Current rules (until 30 June 2027)

Under the existing system, if your rental property generates a loss (expenses exceed rental income), you can deduct that loss against your other income — including your salary. This is negative gearing. It effectively means the government subsidises part of your investment loss through a lower tax bill.

For a detailed explanation of how negative gearing currently works, see our article on Negative Gearing Explained.

New rules from 1 July 2027

From 1 July 2027 (Budget Paper No. 2, p.21):

Established (existing) residential properties:

Rental losses can only be offset against rental income or capital gains from residential property
Losses cannot be offset against wage/salary income, business income, or other non-property income
Excess losses are carried forward and can be used against future residential property income

New builds:

Continue to enjoy full negative gearing — losses can be offset against all types of income
This includes off-the-plan purchases and substantial renovations

What counts as a "new build"?

The Budget defines new builds as properties that have not previously been occupied as a residence. This includes:

Brand new houses and apartments (developer sales)
Off-the-plan purchases
Properties constructed on vacant land by the purchaser
Substantial renovations that effectively create a new dwelling

It does not include:

Existing homes purchased from a previous owner (even if recently renovated)
Properties that have been previously rented out
Minor renovations or cosmetic improvements

Grandfathering rules

The grandfathering cut-off is 7:30PM AEST on 12 May 2026 (budget night):

Properties acquired before this time: fully grandfathered, negative gearing continues as normal against all income until the property is sold
Contracts entered into but not yet settled before this time: also grandfathered
Properties acquired after this time: subject to the new rules from 1 July 2027

Critical detail: Grandfathering applies to the property, not the investor. If you sell a grandfathered property and buy a new established property after the cut-off, the new property is subject to the restrictions.

Excluded property types

The following are not affected by the negative gearing changes:

Properties held in widely held trusts (e.g., real estate investment trusts)
Properties in regulated superannuation funds
Build-to-rent developments
Commercial property (offices, retail, industrial)
Holiday homes not rented out (no deduction applies anyway)

Capital gains tax overhaul

End of the 50% CGT discount

Since 1999, individual taxpayers selling a CGT asset held for more than 12 months have received a 50% discount — effectively halving the taxable gain. From 1 July 2027, this is replaced.

How cost base indexation works

Under the new system, instead of a flat 50% discount, you adjust the cost base of your asset for inflation using the Consumer Price Index (CPI):

Indexed cost base = Original cost base x (CPI at sale quarter / CPI at acquisition quarter)

This means your gain is calculated on the real (inflation-adjusted) profit rather than the nominal profit.

Worked example: Old rules vs. new rules

Scenario: You bought an investment property for $600,000 in July 2020. You sell it in July 2030 for $900,000. Assume CPI rose 35% over that period.

Under old rules (50% discount):

Capital gain: $900,000 - $600,000 = $300,000
After 50% discount: $150,000 taxable
At 37% marginal rate: $55,500 tax

Under new rules (cost base indexation + 30% minimum):

Indexed cost base: $600,000 x 1.35 = $810,000
Capital gain: $900,000 - $810,000 = $90,000 taxable
At 37% marginal rate: $33,300
But 30% minimum on net gain: 30% x $90,000 = $27,000
You pay the higher amount: $33,300 tax

In this example, the new system actually produces a lower tax bill because CPI indexation removed the inflation component of the gain. However, in scenarios with rapid property price growth that outpaces inflation, the old 50% discount could have been more generous.

The 30% minimum tax on net capital gains

A minimum 30% tax rate applies to your net capital gains (after indexation). This means:

If your marginal rate is below 30% (e.g., income under $45,000), you still pay 30% on capital gains
If your marginal rate is above 30%, you pay at your normal marginal rate
Income support recipients (including Age Pension) are exempt from the 30% minimum

Special rule for new residential property

Investors in new residential properties can choose whichever method produces a better outcome:

The old 50% CGT discount, OR
Cost base indexation with the 30% minimum tax

This incentive is designed to encourage investment in new housing supply rather than established properties.

Transitional rules for existing assets

The 50% CGT discount continues to apply to any capital gain arising before 1 July 2027
After 1 July 2027, indexation applies from the original acquisition date
If you hold a property bought in 2020 and sell in 2030, the full gain is calculated using the new rules — the transition date does not create two separate gain calculations

Foreign investment ban extended

The ban on foreign persons purchasing established residential dwellings has been extended to 30 June 2029 (originally set to expire in 2027).

Key details:

Foreign nationals cannot buy established residential property in Australia
Exemptions exist for permanent residents and New Zealand citizens
Foreign buyers can still invest in new builds (which also qualifies for negative gearing)
Penalties for breach include divestment orders and fines

The stated objective is to reduce competition for existing homes while channeling foreign capital into new housing supply.

Impact on different groups

Existing property investors (properties acquired before budget night)

What stays the same:

Full negative gearing continues on your existing properties
You can continue to claim all expenses against any income
Depreciation schedules are unaffected

What changes:

CGT treatment changes if you sell after 1 July 2027 — cost base indexation replaces the 50% discount
The 30% minimum tax applies to any gain arising after 1 July 2027

Strategic considerations:

Selling before 1 July 2027 locks in the 50% CGT discount on the full gain
Selling after may result in higher or lower tax depending on how much of the gain is "real" vs. inflationary
There is no urgency to sell solely to capture the old discount — run the numbers for your specific situation

New property investors (after 1 July 2027)

Established properties:

Rental losses only deductible against property income
Must fund any cash shortfall entirely from own resources or property income
CGT uses cost base indexation with 30% minimum

New builds:

Full negative gearing against all income
Choice of 50% discount or indexation for CGT
Effectively a dual incentive: tax-subsidised holding period AND more flexible CGT treatment

The investment calculus changes: For investors choosing between established and new properties, new builds now carry significant tax advantages. The government projects this will redirect approximately $3.6 billion in investment toward new housing supply over five years.

First home buyers

Positive effects:

Less competition from investors on established homes (investors redirected to new builds)
Foreign buyer ban reduces overseas competition
Government projects 75,000 additional homeowners over the next decade

Timing considerations:

Effects won't be felt immediately — changes start July 2027 and market adjustment takes time
Established property prices may soften slightly as investor demand redirects
New build prices may increase as investor demand concentrates there

Renters

Potential risks:

Fewer investors buying established rental stock could slow rental supply growth
This could put upward pressure on rents, particularly in markets with already-tight supply

Mitigating factors:

Existing investor properties remain in the rental market (no reason to sell)
New builds (which retain negative gearing) will add to rental supply
Changes are gradual — only affecting post-budget-night acquisitions
Government position: overall housing supply increase will offset any tightness

Timeline: Rental market effects are unlikely before 2028-29 at the earliest, given the July 2027 start date and the time required for investor behavior to shift.

What to do now: practical steps

For existing investors

Don't panic sell — your properties are grandfathered for negative gearing
Model your CGT scenarios — use our Capital Gains Tax Calculator to compare the 50% discount (if selling before July 2027) vs. indexation (if selling after)
Review your portfolio — consider whether your investment strategy changes given the new tax environment
Keep records of your cost base — indexation requires accurate original cost base documentation including purchase costs, stamp duty, and capital improvements

For prospective investors

Consider new builds — they now carry significant tax advantages (full negative gearing + CGT choice)
Run the numbers without negative gearing — if buying established, ensure the investment is viable without deducting losses against your salary
Factor in the 30% minimum CGT — if your marginal rate is below 30%, CGT on property is now effectively 30% regardless
Timing: If you are considering an established property purchase, doing so before 7:30PM AEST 12 May 2026 would have secured grandfathering — this window has now closed

For first home buyers

Established homes may face less competition — investor demand is shifting to new builds
Don't rush — market adjustment takes 12-18 months from the July 2027 start date
Consider both new and established — new builds attract more investors (potentially higher prices) while established may see reduced demand

Frequently asked questions

Does grandfathering apply if I refinance my existing investment property?

Yes. Refinancing does not affect grandfathering. The key date is when the property was acquired (contract signed), not when the loan was originated or restructured.

Can I still claim depreciation on established properties after July 2027?

Yes. Depreciation (capital works deductions under Division 43 and decline in value under Division 40) continues as normal. The restriction only applies to net rental losses — i.e., when total deductions (including depreciation) exceed rental income.

What about commercial property — is that affected?

No. The negative gearing and CGT changes apply only to residential property. Commercial property (offices, retail, industrial, rural) is unaffected and retains full negative gearing and the current CGT rules.

How will this affect property prices?

This is the subject of significant debate. The government projects that limiting negative gearing on established homes will reduce investor demand, making established properties more affordable for owner-occupiers. Critics argue that reduced investment could lower construction incentives. Historical evidence (from the brief removal of negative gearing in 1985-87) is inconclusive due to different market conditions.

I bought a property off-the-plan before budget night but settlement is after July 2027. Am I grandfathered?

Yes. The grandfathering applies to contracts entered into before 7:30PM AEST 12 May 2026, regardless of settlement date.

What if I own property through a self-managed super fund (SMSF)?

Properties held in regulated superannuation funds (including SMSFs) are excluded from the negative gearing restrictions. The fund's existing tax treatment continues.

Related tools

Capital Gains Tax Calculator — model your CGT under both the old discount and new indexation rules
Negative Gearing Calculator — assess your property's cash flow position
Investment Property Tax Deductions — full guide to claimable expenses