Overview: What Changed and Why

The 2026-27 Federal Budget, handed down on 12 May 2026, introduced the most substantial changes to residential property investment tax policy since negative gearing was first introduced. The reforms have two main components: restricting negative gearing on established residential properties, and replacing the existing 50% Capital Gains Tax discount with a new indexation-based system.

The stated aim is to moderate property price growth, improve housing affordability, and encourage investment in new housing supply rather than established stock. Whether it will achieve these goals is a matter of significant debate among economists.

Negative Gearing — The New Rules Explained

Negative gearing has long been a cornerstone of Australian property investment strategy. When your property costs (interest payments, maintenance, rates, insurance) exceed the rental income it generates, that net loss could previously be deducted against your salary or other income — reducing your overall tax bill.

Under the new rules, this changes significantly for established properties purchased after 7:30pm on 12 May 2026.

Who is most affected?

The impact of losing negative gearing is largest for investors with high marginal tax rates, high leverage, low rental yields, and high interest expenses — typically investors in the early years of ownership in high-value markets like Sydney or Melbourne. For landlords who are mortgage-free or have modest loans, the practical impact is smaller, as there may be little or no net rental loss to begin with.

Capital Gains Tax — The 50% Discount Is Gone

The second major change affects what happens when you sell an investment property. Currently, if you have held the property for more than 12 months, only 50% of your capital gain is included in your taxable income — effectively halving your CGT liability. This is one of the main reasons property has been a preferred investment vehicle over shares and other assets.

From 1 July 2027, this 50% discount is replaced by a new system for assets acquired after the Budget night cut-off.

For investors who have held property for many years in a low-inflation environment, the indexation approach may produce a similar or better outcome than the old 50% discount. However, in a higher-inflation environment — which Australia is currently experiencing — the net effect depends heavily on the specific numbers. Speak with a registered tax agent before making any decisions.

New Builds: The Exemption You Need to Understand

The government has deliberately carved out a significant exemption for newly constructed properties. The policy intent is clear: encourage investment in new housing supply rather than trading of existing stock. For investors considering their next property, understanding what qualifies as a “new build” is now critical.

What qualifies as a new build?

Note that properties in widely held trusts and superannuation funds are also exempt, as are build-to-rent developments and investments supporting Government housing programs.

How It Affects You: Three Common Scenarios

Will Rents Go Up?

This is the question most renters — and many landlords — are asking. The honest answer is: modestly and gradually, but probably not dramatically.

The Commonwealth Bank’s analysis, based on Treasury modelling, estimates that rents could rise by around $2 per week for a household paying the current median rent. That is a small number, and it is consistent with independent economic analysis that suggests the overall impact on rental supply will be limited — particularly given that the grandfathering provisions mean the existing rental stock is unaffected for now.

The more significant risk to rental supply comes over time, if fewer investors purchase established properties and the stock of rental housing gradually shifts. This effect would be most pronounced in inner-city markets with high proportions of investor-owned stock.

CBA’s updated housing price forecast now expects dwelling price growth of around 3% to December 2026, down from a prior estimate of 5% — a meaningful moderation, but not a crash.

What To Do Now: Practical Steps

APOA’s View

APOA is a community of real landlords — not a lobby group for property developers, and not an advocacy arm for tenant groups. Our role is to help members understand what is happening, think clearly about the implications, and make informed decisions.

On the policy merits, reasonable people disagree. There is a genuine argument that the existing negative gearing and CGT discount combination contributed to price inflation in established markets, and that rebalancing incentives toward new supply makes sense. There is also a genuine argument that reducing investor returns on established properties will gradually shrink the private rental supply, putting upward pressure on rents for ordinary tenants over time — a concern shared by CPA Australia and other professional bodies.

What is clear is this: the changes are real, the cut-off date has already passed, and the rules will take effect from 1 July 2027. For existing property owners, the position is straightforward — you are grandfathered and nothing changes until you sell. For anyone considering a new purchase, careful modelling and professional advice are essential.

We will continue to track this legislation as it progresses through Parliament and update the community with any material changes to the detail.