Budget 2026: Major changes to negative gearing, CGT discount in huge housing shakeup
Negative gearing will be limited to new housing, and the capital gains discount will be abolished under sweeping tax reforms delivered in this year’s budget.
Australia’s most controversial property tax breaks will be severely restricted in a move the government says will help 75,000 people buy their first home in the next decade.
Housing formed a centrepiece of what Treasurer Jim Chalmers described as “the most important and ambitious budget in decades”, delivered on Tuesday night. In his budget address, Mr Chalmers said the reforms would “help rebalance a system where house prices have decoupled from incomes.”
“These changes will level the playing field for workers and first-home buyers, and support investment in productive assets, including new housing supply,” Mr Chalmers said.
Negative gearing abolished for existing homes
Under previous negative gearing rules, investors whose expenses exceeded rental income, resulting in a loss, could deduct that loss from other income, such as wages.
From 1 July 2027, negative gearing will be limited to only newly built homes in a bid to encourage more housing construction. Established residential investment properties purchased before 7:30 pm on 12 May 2026 will be exempt from the changes until the property is sold. This includes contracts exchanged but not yet settled. Current owners of negatively geared investment properties will still be able to deduct rental losses from other taxable income.
Investors who purchase established residential properties can still offset rental losses against capital gains when selling, or carry forward losses to offset against rental income in future years.
Commercial properties will be exempt from the changes to negative gearing.
REA Group senior economist Anne Flaherty said the negative gearing would likely drive some investors away from residential property to other investments.
“Commercial property may begin to look more attractive, particularly to those seeking stronger yields and less exposure to changing housing policy,” she said.
“Many investors tolerate low yields when owning residential property because of the tax treatment and long-term capital growth prospects. These changes now alter that equation.”
Capital gains tax discount replaced with an indexation model
Investors must pay capital gains tax (CGT) when selling a property, with previous rules giving investors a 50% discount if they hold a property for more than 12 months, meaning tax is only paid on half of the gain.
This discount will be abolished from 1 July 2027, with the old pre-1999 inflation-linked indexation system applying instead.
That means when selling an investment property, the cost base (the purchase price plus any purchase costs such as stamp duty) will be indexed to inflation – a move Mr Chalmers said would “restore the taxation of real gains”.
In addition, a minimum 30% tax rate would apply for capital gains from July next year. The changes will apply to both property and shares. Investors who buy new homes will be able to choose from either the existing 50% CGT discount or the indexation method when they sell the property. Reforming negative gearing and the capital gains tax discount is expected to raise $3.6 billion over the five years from 2025–26.
Source: REA Group
