Negative Gearing & CGT Reform: What the 2026 Budget Means for Every Property Investor
Budget night 12 May 2026 changed the rules for residential property investment. From 1 July 2027, negative gearing is restricted to new builds, and the 50% CGT discount is replaced with CPI indexation plus a 30% minimum tax. Here is the complete guide.
What changed for negative gearing and CGT in the 2026 Budget?
From 1 July 2027: (1) Negative gearing on established residential property is restricted — losses can only offset other property income, not salary and wages. New builds remain fully deductible. (2) The 50% CGT discount is replaced with CPI cost base indexation plus a 30% minimum tax on real gains. Critically — properties you already own are grandfathered. If you owned property at 7:30pm AEST on 12 May 2026, nothing changes for you.
- •Grandfathered: all properties owned at Budget night (12 May 2026, 7:30pm AEST)
- •SMSFs and widely held managed trusts are fully excluded from the negative gearing changes
- •Main residence CGT exemption and all four small business CGT concessions are unchanged
- •New builds can still be fully negatively geared and investors can choose their preferred CGT method
Key Takeaways
- 1Properties owned before 12 May 2026 (7:30pm AEST) are fully grandfathered — negative gearing continues as normal until sold
- 2From 1 July 2027, losses on new established property purchases can only offset residential property income — but carry forward indefinitely
- 3New residential builds are exempt: full negative gearing and choice of 50% CGT discount or CPI indexation at sale
- 4The 50% CGT discount is replaced with CPI indexation — high-growth assets pay more tax, low-growth assets pay less
- 5A 30% minimum tax on real capital gains ensures low-income earners selling large assets pay at least 30% (Age Pension/JobSeeker recipients are exempt)
- 6SMSFs and managed investment trusts are excluded from all negative gearing changes
- 7Treasury projects 75,000 more owner-occupiers over 10 years; rent impact is less than $2/week
Three Changes, One Budget Night
The 2026–27 Federal Budget introduced the most significant restructuring of investment property taxation since 1999. The Government framed it as a housing affordability measure — levelling the playing field for first home buyers while preserving the gains existing investors have already made. There are three distinct changes, each with its own start date, exemptions, and transitional rules.
Negative Gearing — New Builds Only
From 1 July 2027, losses on new established property purchases can only offset residential property income. New builds remain fully deductible against all income.
CGT — CPI Indexation Replaces 50% Discount
For gains accruing after 1 July 2027, the flat 50% CGT discount is replaced with inflation-adjusted cost base indexation — the system used between 1985 and 1999.
30% Minimum Tax on Capital Gains
A floor tax ensures real capital gains (after inflation adjustment) are taxed at no less than 30%, regardless of the investor's marginal income tax rate in the year of sale.
Change 1: Negative Gearing — The Full Breakdown
Today, if your rental income is less than your interest and expenses, that loss reduces your taxable income from all sources — including your salary. From 1 July 2027, this tax offset only applies to properties that genuinely add to Australia's housing supply (new builds). For everything else purchased after Budget night, losses are ring-fenced to residential property income.
The key reassurance: losses are not forfeited. They carry forward indefinitely and can be used against future rental income, future capital gains from property sales, or any other residential property income. In practice, for most long-term investors, the total tax paid over the full investment cycle is very similar to current rules.
Transitional Rules at a Glance
| When you bought | Negative gearing treatment | Until when |
|---|---|---|
| Before 12 May 2026, 7:30pm | Losses offset all income (salary + other) | Until sold — grandfathered |
| 12 May 2026 – 30 June 2027 | Losses offset all income during this period only | Ceases 1 July 2027; then carry-forward only |
| From 1 July 2027 (established) | Losses only offset residential property income | Excess losses carry forward indefinitely |
| Any date (new build) | Full negative gearing against all income | No change — fully exempt |
Carry-Forward in Action: Yoonseo's 10-Year Investment
$519k established property, $100k income, rented for 10 years then sold for $814k. Source: 2026 Budget factsheet cameo.
Red bars = rental losses (years 1–5), green bars = positive net rent (years 6–10). Yellow line = carry-forward balance. The remaining $4,799 at sale offsets part of the capital gain. Total extra tax paid vs current rules: $186 over 10 years.
The carry-forward insight: Over a full 10-year hold, Treasury modelling shows the difference in tax paid under the new carry-forward rules vs current negative gearing is just $186 for a $519k property. For most long-term investors, the impact is minimal — the losses are deferred, not destroyed.
Change 2: CGT — From Flat Discount to CPI Indexation
Since 1999, investors who hold an asset for more than 12 months halve their capital gain before calculating tax — the 50% CGT discount. It was always a rough approximation of inflation. From 1 July 2027, for gains accruing after that date, the Government returns to the original 1985–1999 system: adjust your cost base for CPI inflation, and tax only the real gain above that.
Current Rules (until 30 June 2027)
50% Flat Discount
Hold an asset 12+ months. Halve the nominal gain. Pay tax on the other half at your marginal rate. At the top rate of 47%, that's an effective 23.5% tax on the full nominal gain — regardless of how fast the asset grew.
New Rules (from 1 July 2027)
CPI Indexation + 30% Floor
ATO tools adjust your cost base by CPI. Only gains above that inflation-adjusted base are taxed at your marginal rate — subject to the 30% minimum. High-growth assets pay more; low-growth assets can pay less.
Effective CGT Rate: Old 50% Discount vs New CPI Indexation
At 47c (top) marginal tax rate. Based on Treasury analysis using 20-year average returns by asset class. Red = new rules cost more, green = new rules cost less.
Houses with strong historical growth pay more tax under indexation (the real gain is a higher share of the nominal gain). Units and shares with lower real returns pay the same or less because CPI absorbs a larger share of their nominal gain.
Example: Zoe — Shares bought after 1 July 2027
Zoe buys shares for $100 on 1 July 2027. She sells them on 1 July 2032 for $125 (4.6% annual return). With 2.5% annual inflation, the ATO indexed cost base is $113. Her taxable gain is $12 — slightly less than the $13 she would have paid under the 50% discount. Lower-growth investments benefit under the new rules.
Change 3: The 30% Minimum Capital Gains Tax
This change targets a specific planning strategy: deferring asset sales to years when income is low — retirement, a career break, or a low-income year — to pay minimal CGT. From 1 July 2027, a floor tax ensures real capital gains are taxed at no less than 30%.
Who the minimum tax affects
- • Retirees with low taxable income who realise large capital gains
- • Investors taking a low-income year specifically to reduce CGT
- • Anyone whose marginal rate in the year of sale would be below 30%
Who is exempt from the minimum tax
- • Age Pension recipients (in years they receive any payment)
- • JobSeeker and other means-tested income support recipients
- • Investors already paying 30%+ on capital gains (most earners)
Example: Jack — Minimum Tax in Practice
Jack has $25,000 taxable income in 2029–30 and realises a $10,000 capital gain. His normal income tax on the gain would be 14% ($1,400). Since this is below the 30% floor, Jack pays an extra $1,600 to bring his CGT to $3,000 (30%). Had Jack been receiving the Age Pension that year, he would be exempt from the minimum tax entirely.
How the Changes Apply: Official Government Scenarios
Michael — Existing Property Owner (Grandfathered)
No ImpactMichael owns an investment property purchased before 12 May 2026 that is negatively geared. He can continue to negatively gear this property against all income for as long as he holds it. Nothing changes.
When he sells two years after July 2027 for $560,000, the ATO tools determine the property was worth $500,000 at 1 July 2027. On the $60,000 post-commencement gain, after 2.5% annual inflation the taxable gain is $34,688 — slightly more than the $30,000 under the 50% discount. Tax at 47%: $16,303 vs $14,100. Additional tax on the post-July 2027 gain: $2,203.
Yoonseo — New Buyer of Established Property
Carry-Forward Rules ApplyYoonseo earns $100,000 and buys an established property for $519,000 after the policy start date. She rents it out and sells it 10 years later for $814,447. During the first 5 years she accumulates $22,879 in carried-forward rental losses. Over the following 5 years she uses those losses to reduce her positive net rent from $18,079 to zero. At sale, the remaining carry-forward reduces her capital gain by $4,799.
Total extra tax over 10 years vs current rules: $186. Had she bought a new build, she would pay no additional tax at all.
Jane — Existing Investor Selling After July 2027
Transitional CGT SplitJane buys an asset for $800,000 on 1 July 2022 and sells for $1,600,000 on 1 July 2032 (7.2% annual return). ATO tools show the asset was worth $1,131,371 at 1 July 2027. Her CGT is calculated in two parts:
Pre-July 2027 gain (50% discount applies)
$165,685 taxable
(gain of $331,371 × 50%)
Post-July 2027 gain (CPI indexation)
$319,958 taxable
(gain of $468,629 less inflation)
Total taxable gain: $485,643. Tax at 47%: $228,252 vs $188,000 under the old rules — $40,252 more. The higher effective tax reflects Jane's strong 7.2% annual return above inflation.
David, Ben and Kate — How Returns Determine Your CGT Outcome
$500k asset purchased July 2027, 10-year hold, $100k other income, 2.5% annual inflation. Source: 2026 Budget factsheet.
Ben — 2.5% return
Return equals inflation — no real gain. Taxable gain under indexation: $0 (vs $70,021 under 50% discount). Saves $24,858.
David — 5% return
Taxable gain under indexation: $174,405 (vs $157,224). Pays $8,075 more — modest increase for a moderate-growth asset.
Kate — 7.5% return
Taxable gain under indexation: $390,474 (vs $265,258). Pays $58,851 more — the bigger the real gain, the bigger the tax increase.
New Builds: The Best Deal for Investors Post-2027
The Government has deliberately made new residential builds the most tax-advantaged investment structure going forward. Investors who buy qualifying new builds can negatively gear losses against all income (as per current rules) AND choose between the 50% CGT discount or CPI indexation when they eventually sell — whichever gives them the better outcome.
What Qualifies as an Eligible New Build?
| Eligible new build ✓ | NOT eligible ✗ |
|---|---|
| New apartment bought off-the-plan | Established property with new bedrooms added |
| Duplex replacing a single freestanding house (increases supply) | Freestanding house rebuilt on same footprint (no supply increase) |
| Any residential construction on previously vacant land | Granny flat on land already holding an ineligible property |
| New build occupied by builder for less than 12 months before first sale | New build occupied for more than 12 months before first sale |
Note: The new build eligibility applies to the first purchaser only. Subsequent purchasers cannot access negative gearing benefits or the 50% CGT discount for that property.
Strategic implication for investors
If you are planning to build an investment portfolio after July 2027, targeting new builds in growth corridors gives you the full existing tax treatment plus the ability to choose your CGT method at sale. Off-the-plan apartments, house-and-land packages in new estates, and knock-down rebuilds that increase density are all eligible. Speak with your broker about structuring your loan to maximise the investment from day one.
What Is NOT Changing
Your main residence
CGT exemption on your home is completely unchanged. No CGT on the sale of your principal place of residence.
SMSFs
Superannuation funds (including SMSFs) are fully excluded from the negative gearing changes. Your SMSF property strategy is unaffected.
Managed investment trusts
Widely held trusts such as most listed REITs and MITs are excluded from negative gearing changes.
Commercial property
Negative gearing changes apply only to residential property. Commercial, retail and industrial property investments are unchanged.
Shares and other assets
Negative gearing on shares, ETFs and other non-residential assets is unchanged. (Note: CGT indexation applies to all CGT assets held 12+ months.)
Small business CGT concessions
All four small business CGT concessions are retained in full — 15-year exemption, 50% active asset reduction, retirement exemption, rollover.
Affordable housing discount
The existing 60% CGT discount for qualifying affordable housing investments is fully retained.
Properties already owned
Every property you held at 7:30pm AEST on 12 May 2026 (including contracts exchanged but not yet settled) is grandfathered under current negative gearing rules.
What Treasury Modelling Says About Housing
The Government modelled the impacts carefully to minimise market disruption. Because existing investors are grandfathered and CGT only applies to gains after July 2027, there is no incentive for a rush of selling before the deadline — the policy is designed to be orderly.
75,000
More Owner-Occupiers
Projected over the next decade — equivalent to reversing 10 years of declining home ownership rates for 25–34 year olds.
<$2
Per Week Rent Increase
Treasury estimates the impact on median-rent households is less than $2/week — offset by $20+/week Commonwealth Rent Assistance increases since 2023.
~2%
Less Price Growth
A small, temporary reduction in house price growth over a couple of years — more than offset by increased housing supply from the broader Budget package.
OECD context: In its most recent country report on Australia, the OECD explicitly recommended cutting or eliminating the CGT discount and phasing out negative gearing — citing both housing affordability and tax efficiency concerns. Australia is moving in line with the approach of many comparable OECD nations where capital gains on average returns are taxed at 20–30%.
5 Steps to Take Before 1 July 2027
Confirm all your existing properties are captured
Verify that any contracts exchanged before 12 May 2026 are documented. If settlement is pending, you are still grandfathered. Keep records of the exchange date for future tax returns.
Get a market valuation of assets you own as at 1 July 2027
For any property or share portfolio you own and plan to sell after 2027, lock in a credible valuation as at 1 July 2027. This is the split point for the CGT calculation — having a solid valuation simplifies your tax return at sale and can reduce the post-July 2027 taxable gain.
Run the numbers on new builds in your target market
If you are planning future property investment, new builds are now the most tax-efficient residential option. Compare the yield and growth potential of new builds in your preferred suburbs against the full tax advantage — both the negative gearing and CGT flexibility.
Review your SMSF strategy — it is a competitive advantage
SMSFs are excluded from the negative gearing changes. If you are building a long-term property investment portfolio, an SMSF structure retains full negative gearing flexibility for residential property, potentially making it a more tax-effective vehicle than personal ownership for future established property purchases.
Speak to your broker and accountant together
These reforms change the optimal loan structure for investment properties. Interest-only periods, loan splits and offset account strategies all interact with the new carry-forward negative gearing rules. A mortgage broker can model the after-tax cash flow under the new system for any property you are considering.
Frequently Asked Questions
Frequently Asked Questions
Sources & References
This article references information from the following authoritative sources:
Raj Bhangu
Principal Mortgage Broker
Raj Bhangu is the principal broker at iSmart Finance Group with over a decade of experience helping Australians navigate property investment, rate cycles, and tax-efficient loan structuring. He tracks legislative changes affecting mortgage holders and investors closely.
How Do the Changes Affect Your Property Strategy?
These are significant changes, but the right loan structure and investment approach can keep your portfolio working hard. Our brokers will model your specific situation — existing holdings, future plans, and carry-forward impact — at no cost to you.
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